The bad news: Philip Morris International (PM) didn’t do especially well last quarter, with sales and earnings both falling on a year-over-year basis.
The good news: The reason behind falling sales and per-share earnings is slowly but surely going away.
It’s an encouraging turn of events for current and would-be Philip Morris investors who have watched PM stock flounder over the past couple of years as currency headwinds abate and smoking-cessation stabilizes.
The end result is a reliable dividend play with a high yield and a payout that’s positioned to improve. Income investors may want to take note.
Philip Morris Earnings
Last quarter, Philip Morris earned $1.24 per share on $6.93 billion in revenue. Per-share profits were down from Q3-2014’s $1.38, and the top line slumped 12% on a year-over-year basis. Still, the results exceeded the figures analysts were expecting. The pros were calling for a top line of $6.76 billion, which Philip Morris handily exceeded. And the profit of $1.11 per share of PM stock analysts had projected was rather well trounced.
And, even those numbers may understate just how functionally well Philip Morris did during Q3. Taking out the adverse impact of an unusually strong U.S. dollar, earnings actually grew nearly 16% during the third quarter. Revenues were up 6% on a constant-currency basis.
Or, perhaps the most telling metric that business isn’t terrible right now is the fact that total shipments of cigarettes were only 1.5% lower for the quarter.
Regardless of how you slice it, a strengthening global economy facilitated higher cigarette prices, and where smoking-cessation efforts are taking a toll, the company is getting respectable if not earth-shattering traction with its alternatives like noncombustible cigarettes.
It’s all enough to prompt the company into upping its earnings outlook for the full year. Philip Morris now expects per-share profits to rise between 11% and 12% on a constant-currency basis in 2015. That translates into a projected per-share profit of $4.35 and 4.40.
It’s Safe(r) to Buy PM Stock Now
Though there are still some battles to be fought, Philip Morris is arguably through the worst of the storm, and should start finding more of a tailwind than a headwind.
Two key factors have surfaced pointing to that end.
First and foremost, the exceedingly strong U.S. dollar that has crimped the top and bottom line for nearly a year now is finally starting to subside. Although it could be year before it revisits 2012’s and 2013’s levels that were very friendly to U.S. business operating in foreign markets, any relief on this front would be a welcome relief.
And, even if the greenback simply holds its current level, at least from this point the year-ago comparisons will already fully reflect the heroic rise (and subsequent impact) of the U.S. dollar.
Second, the heaviest waves of anti-smoking campaigns appear to have lost steam. Although they’ll never go away completely, they should become less and less disruptive from here. Indeed, in China — where Philip Morris has a strong presence — the country’s government expects smoking to keep growing despite initiatives to curb it.
Moreover, where Philip Morris is ceding ground on the traditional cigarette front, it has a plan and product to offset that waning with electronic cigarettes. The company believes that segment could make up 10% to 15% of its total revenue within a decade.
In other words, investors who’ve been waiting on the sidelines to diversify their dividend stocks by adding a cigarette name to their collection have good reason to put PM stock on their watchlist if not directly in their portfolio. The current yield of 4.7% is solid, and the company even announced a dividend hike with its earnings report. Plus, brewing earnings growth may well accelerate the pace of dividend increases in the foreseeable future.
If you’re an income investor, there’s a lot to like about Philip Morris going forward.
As of this writing, James Brumley did not hold a position in any of the aforementioned securities.
