Income investors cheered the news that Philip Morris International (PM) upped its dividend by more than 10%, making for a 94-cent annual dividend that bumps up PM’s yield to a healthy 4.4%.
The payout is a decent booby prize for investors who have watched PM grossly outperform the markets so far in 2013, up just about 3% amid a 17% improvement in the S&P 500.
But weep not for PM or its shareholders. While it might not be roaring money, Philip Morris should continue to hold its own.
Tobacco stocks such as Philip Morris — as well as sectormates Lorillard (LO), Altria (MO), and Reynolds American (RAI) — are up against some sticky issues: health awareness and government regulation being among the most pressing ones.
The most recent assault on the industry is in Australia, where a plain-packaging law requires cigarette makers to offer their product in simple, olive-green packets that can have graphic health warnings.
New Zealand and Ireland are expected to implement similar laws soon, and Charles Sizemore suggests India, Canada and the U.K. could be next in line. The effect on revenues from the packaging laws is something investors will need to follow, considering Australians are already claiming their cigarettes “taste different” out of the new packaging.
And in the U.S., where most of the big publicly traded names play, large governmental health-awareness campaigns, heavy taxation and various smoking bans have all done their part to crimp the growth of Big Tobacco.
However, tobacco is one tough industry.
Despite decades of broader opposition to smoking, most Big Tobacco stocks have been able to grow or at least maintain profits for the most part. That’s the kind of thing that happens when you offer an addictive product.
As for the stocks themselves, outsized dividends that top most other traditional equities add a lot of durability and something of a floor for these companies.
Also, there’s one other thing to watch: E-cigarette use is growing, and could become the next driver for the sector. The product is fairly new, and some regulators and politicians are even skeptical of this supposedly healthier alternative. Plus, some consider e-cigarettes as more of a way to wean smokers off the “stick,” rather than rope them in. However, if it’s the latter, e-cigs could help keep Big Tobacco afloat.
The bottom line: Take PM’s dividend increase with a grain of salt, but not a bucket. Philip Morris still operates in an increasingly rocky business, but its product still has enough oomph to make it a worthwhile income investment.
PM’s new payout comes Oct. 11, available to shareholders of record on Sept. 26.
Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing, he did not hold a position in any of the aforementioned securities.