From 1900 to 2010, the tobacco industry was hands-down the best industry to invest in. According to Credit Suisse, had you put $1 in tobacco stocks in 1900, it would have increased in value to over $6.3 million by 2010. Compare that to the average American industry, which would have turned $1 into $38,255.
Since being splitting off from Altria Group Inc. (NYSE:MO) in 2008, shares of Philip Morris International, Inc. (NYSE:PM) are up 136%, while the broader market has risen 90%. That performance is certainly solid, but it’s only a small taste of tobacco stocks’ long-term power.
But enough with the past — we want to know where Philip Morris is going in the future. So let’s take a look at the good and bad of Philip Morris to decide if PM stock is a buy today.
PM Stock Pros
Recession resistant: Philip Morris sells an addictive product. While a typical consumer can easily cut back on the number of Starbucks lattes they consume if money gets tight, it is much more difficult for a smoker to up and quit smoking. This fact has helped the tobacco industry become more recession resistant than other industries and one of the main reasons why their stock performance over the past 100 years is so amazing.
Simplicity: The cigarette has not changed much over the past 100 years. The major cigarette manufacturers have perfected the production process and due to the product not changing, research and development costs have remained low. Without the worry of a major technological innovation completely changing the industry, management is able to focus on fewer goals, like growing organic business and keeping costs low.
Dividend yield: Currently, Philip Morris pays a dividend of $1 per quarter, representing a yield of 4.7%. Due to the reliability of its sales and low overhead costs to make its product, PM’s dividend is very reliable. Philip Morris has increased its dividend each year since splitting from Altria in 2008. Furthermore, although PM stock is too young to be a dividend aristocrat, Altria has increased its dividend 48 times in the past 45 years.
PM Stock Cons
Decline in smoking: With more education on health risks and more bans on smoking, the number of smokers worldwide continues to decline. Currently 78% of the world population doesn’t smoke — a number which is expected to climb to 81% by 2025. The World Health Organization is also pushing to reduce tobacco consumption another 30% by 2025. And because tobacco products are a key cause in premature deaths, the industry is dealing with fewer smokers partly because it’s killing its own customers.
Socially Responsible Investing: While socially responsible investing isn’t a new concept, it does seem to be gaining popularity as more people focus on their own health. And since they care more about their own health, they tend to show less support for companies that clearly compromise the health of others. A recent report from the Financial Times suggests that even large institutions are now getting on board. These institutions are claiming that they are now trying to better align their holdings with the values held by their clients. If the big money continues to trend out of the sin stocks, it could mean big problems for the Philip Morris stock price.
E-Cig Revolution: Despite a recent survey showing the interest in e-cigs has dropped, the technology is a big reason to worry about Philip Morris moving forward. One of the main reasons the tobacco stocks have performed so well in the past is because the companies haven’t had to spend much money innovating their product. But, the e-cigarette has and will continue to change that dynamic as technology and tobacco combine. Higher research and development spending will put pressure on PM’s bottom line. Furthermore, while PM controls the top selling brands of cigarettes throughout the world leading with Marlboro, the e-cig could put pressure on Philip Morris’s control of the tobacco industry.
Bottom Line on Philip Morris
So, should you buy Philip Morris stock?
Yes. If you have no trouble buying tobacco stocks, then Philip Morris should be at the top of your list of stocks to buy. The industry’s past performance in the face of fewer smokers, PM’s dominant brands, healthy dividend and ability to withstand past economic slowdowns makes PM a buy today.
As of this writing, Matt Thalman was long MO. Follow him on Twitter at @mthalman5513.
