Philip Morris International (NYSE:PM), a holding company spun off from Altria (NYSE:MO) in 2008, is engaged in the manufacturing and sale of tobacco products outside the United States and deals in 180 countries with many local brands. Approximately 30% of sales come from the flagship Marlboro brand, with the rest coming from other/local brands.
Philip Morris International actually is bigger than its former parent ($136.32 billion vs. $61.24 billion in market cap), and it is seeing rising revenue growth of 26.4% in the latest reported quarter vs. Altria’s 3% decline. Since most sales come from appreciating global currencies — many of them in emerging markets — the sales figures get an extra currency kick over time.
The Marlboro brand is a status symbol and, as bad as smoking is, it tends to attract more affluent consumers. Emerging markets offer better demographics than developed markets, and rising incomes tend to translate into rising sales for the company. The business is highly profitable, with 43.42% operating margins producing $11.15 billion in operating cash flow per year, $9.62 billion of which is levered free. In contrast to former parent Altria, Philip Morris does not pay the maximum high dividend as the company invests in the growth of the business. The payout ratio is only 57% vs. Altria’s 93%, and the dividend yield is 3.9%. But the shares offer better appreciation potential and a bigger opportunity for the growth of the dividend because the company grows faster.
Philip Morris might have been a separate public company since only 2008, but it already has shown a remarkable policy of dividend increases, from 46 cents per share when it went public to the current rate of 77 cents a quarter — a 67% boost in dividends in less than four years. Coupled with the share appreciation, it can be more appealing to hold PM shares than many fixed income securities.
They say that bonds are about return of capital while equities are about the return on capital. Shareholders own and bondholders lend — those are two very different parts of the capital structure. Philip Morris can give you the benefit of high income levels in addition to dividend growth rates over time, and that can make it a more attractive investment to many fixed-income options at present.
