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This dividend share is a smoker deal

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It’s no secret that society has slowly stifled smoking as a habit. This societal trend makes tobacco companies like Philip Morris International (MP 1.75% ) look like “dying” stocks to investors. One indicator of this is the fact that the stock is still trading near the same price as in 2012.

But new activity around reduced-risk tobacco products is growing somewhat under the radar at Philip Morris International (PMI), giving the company another chance for a bright future and investors a well-sustained dividend which is currently paying off. 5.8%.

Let’s take a look at three reasons why this title has real potential right now.

Image source: Getty Images.

1. PMI stock is cheap …

PMI stock is cheap at a time when the broader markets continue to trade near their all-time highs. The company is three-quarters of its 2021 fiscal year and aims to end with earnings per share of between $ 6.01 and $ 6.06. Using the current stock price around $ 88, this works out to a price-to-earnings ratio of 15.4. This valuation is cheap at face value, as well as compared to its historic average P / E of 17 and the S&P 500P / E over 28.

Now let’s add some context. We can go back to 2012, when the stock was trading at $ 87 per share and the company made $ 5.17 per share in profit that year. The modest earnings growth makes the company appear to be stagnating, and so has the share price.

2. … But the business is solid

But this stagnation is not necessarily the case. The strength of the US dollar has held back much of the company’s growth over the years. PMI does almost all of its business in foreign currencies, but reports in US dollars.

If the dollar’s value rises against foreign currencies, its overseas sales are converted to US dollars for reporting, resulting in seemingly lower income. We can see below that the dollar has been on a long term bullish trend since 2012.

Real Trade Weighted US Dollar Index: Chart of Advanced Foreign Economies, Goods and Services

Real Trade Weighted US Dollar Index: Data on Advanced Foreign Economies, Goods and Services by YCharts

However, the big difference between PMI in 2012 and 2021 is the development and success of its IQOS system. It is a “reduced risk product” (RRP) that heats tobacco instead of burning it, which PMI says is much less harmful to users than traditional cigarettes.

Philip Morris International first launched IQOS in Japan, its first market in 2014, and the RRP business segment now accounts for 29% of PMI’s total revenue. Its RRP revenue grew 33% year-over-year in the third quarter of 2021, so IQOS momentum remains strong. PMI has planted its flag for IQOS to be the future main business driver of the company and is now actively promoting itself as part of a “smoke-free” future.

3. The PMI dividend allows investors to be paid to keep

The reality for investors is that the stock has been limited for much of the past decade, but PMI’s hefty dividend continues to rise each year and prompts investors to be patient.

The dividend stands at $ 5 per share per year (paid quarterly at $ 1.25 per share) and investors get a solid 5.8% annual return on every share they own at the current price of the year. action. For a long-term investor who continually reinvests those dividends in the stock to buy more stocks, this can boost the composition of dividend income over time.

Management projects $ 11 billion in operating cash flow for the full year 2021, leaving $ 10.4 billion in free cash flow after necessary investments in the business, which can be used to pay dividends. .

An annual dividend of $ 5 per share paid to 1.55 billion shares outstanding means that Philip Morris has a total dividend spend of $ 7.75 billion, spending 74% of its free cash flow on dividends. This free cash flow ratio is starting to get high, but investors should have confidence in the company’s ability to keep paying this payment, especially with revenues expected to grow 7% this year. The tobacco business requires little expenditure to sustain itself and afford a higher distribution rate.

There is always a catch

PMI has many attractive qualities if you are looking for a combination of steady growth and dividend income. However, no investment is “bulletproof”. The biggest headaches for the business will continue to focus on exchange rate fluctuations.

Management expects a $ 0.17 increase in earnings per share due to a weaker US dollar in 2021. Nonetheless, if exchange rates turn unfavorable, the company may again be able to cope. to a strong US dollar offsetting earnings growth. Nonetheless, Philip Morris has proven to be a resilient company and IQOS could set the company up for a bright future.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.