Philip Morris International Inc. (PM, Financial) had a volatile 2019. At the start of the year, shares were priced at $70, only to rise above $90 in March. By September, the stock was back to $70, only to approach the $90 mark again toward the end of the year.
Despite the stock price volatility, the company’s dividend remained strong. The quarterly payout stood at $1.14 per share until the third quarter, after which it was raised to $1.17 per share. Even after the latest rebound, the dividend still delivers a 5.5% yield.
Last year wasn’t the first year in which Phillip Morris experienced volatility. Over the past decade, shares have gone through several mini booms and busts, though the long-term direction has maintained an upward trend.
The dividend, meanwhile, has been remarkably reliable, increasing every year for more than a decade. Despite the increases, the dividend yield was stuck between 3% and 5% for years as the share price moved from $40 to $90. The recent pullback, meanwhile, pushed the yield above 6% for the first time.
The pullback stemmed from several factors, the biggest of which was a general fear that has plagued Phillip Morris for decades: increased regulation and decreased tobacco usage. These fears, while realistic, have created a structural discount for the stock, helping lead to a multidecade streak of outperformance.
Consider that U.S. cigarette expenditures peaked in the same decade that Phillip Morris began its incredible run. Offsetting the industry decline has been a marked increase in pricing power, fueled by ongoing consolidation efforts.
In 2008, Phillip Morris separated its U.S. division into Altria Group Inc. (MO, Financial), making Phillip Morris International a pure-play vehicle for international tobacco sales, which haven’t faced the same pressure as the U.S. For example, revenue in Europe, the Middle East and Africa — which account for more than half of the company’s sales — increased last year.
In total, Phillip Morris has experienced a slight uptrend in revenue and net income over the last 15 years, though fluctuations along the way have consistently caused temporary market panics.
Perhaps most importantly, Phillip Morris has been able to generate billions in free cash flow each and every year, always enough to service its growing dividend. Despite the latest share price drop, the company’s free cash flow still outpaces its dividend obligations by nearly $700 million per year.
Sales and net income growth have been a concern for tobacco companies for decades, yet time and time again, these companies have proven to have an ability to overcome these challenges, creating superior risk-adjusted returns for shareholders.
The past decade has been one of the weakest on record for Phillip Morris stock, yet it still achieved double-digit annual returns. With the dividend yield now up to 5.5%, this stock looks like a perfect fit for defensive and income-oriented investors.
Disclosure: Author owns shares of Philip Morris International.
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