On Wednesday, at the end of its March meeting, the Federal Reserve announced it raised interest rates for the first time since 2018 and plans to make further hikes over the course of 2022. The hike is a quarter of a percentage point, bringing interest rates to the 0.25% to 0.5% range.
The monetary tightening is being implemented to try to slow the pace at which the price of goods and services are rising following the strong economic recovery from the Covid-19 pandemic along with higher fossil fuel and food prices because of the war in Ukraine.
However, there is also a risk that economic growth will slow down amid global uncertainty.
As a result of these developments, investors may be looking to adjust their portfolios to offset economic risks. One way of doing so is to increase exposure to defensive consumer stocks.
One stock that has certainly caught this investor's attention is Philip Morris International Inc. (PM, Financial).
Despite shifts in consumer prefences, cigaretter consumption remains prevalent even in times of economic uncertainty. Therefore, consumers will be willing to pay higher prices, even if it means cutting spending on other necessities.
There has been a drop in cigarette volumes shipped around the world, but this is largely due to health reasons that have prompted many people to quit smoking. The desire to smoke has not been affected at all by the countless anti-smoking campaigns. As the Centers for Disease Control and Prevention has found that at least 25% of high school students smoke, habitual smoking is likely to pick up again, restoring the positive trend in deliveries.
Philip Morris is the manufacturer and distributor of Marlboro, probably the world's most-smoked cigarette brand. The label is by far the most profitable tobacco brand in the entire world, approaching $40 billion in value (five times that of the second-most valuable brand, Pall Mall, according to Statista), making it the world's largest tobacco stock to date with a market value of around $145.3 billion at the time of writing.
As cigarette consumption regains momentum, the rising popularity of smoke-free IQOS (I Quit Ordinary Smoking) products allowed Philip Morris to increase sales year over year by offsetting a recent decline in shipment volumes. Net revenue from smoke-free products is significant for Philip Morris as it accounts for more than 30% of the company's total net revenue ($31.41 billion in 2021), which has grown at a rate of 2% annually over the past three years.
Revenue growth enabled Philip Morris to deliver a nearly 18% year-over-year increase in adjusted diluted earnings for 2021 to $6.08 per share. Based on the last three years of operation, earnings performance is favorable as the company is up 4.7% annually, beating the industry average by 65 basis points.
This data demonstrates that Philip Morris' operations are resilient and increasingly efficient. Even during the crisis in 2020 caused by the Covid-19 pandemic, which forced governments to allocate large sums of money to support businesses and households, the tobacco giant was able to increase sales and profits.
In addition, the company manages to extract more profit from every dollar of sales each year.
This dual role allows the balance sheet to remain solid over time, essentially indicating that any investments can generate a higher return than the cost of the capital invested in the project. The company's return on invested capital of 38% greatly surpasses the weighted average cost of capital of 5.59%.
Solid financial health is behind Philip Morris' 13 consecutive years of dividend payments and the 3.4% rise in the annual dividend since the Covid-19-induced crisis (versus the S&P 500 Index's 3.2% decline).
Helped by IQOS smoke-free products and solid fundamentals, Philip Morris' adjusted earnings are expected to increase between 8% and 11% from the 2021 level to between $6.75 per share and $6.75 per share this year. The average consensus estimate is $6.14.
On March 10, Philip Morris reiterated the quarterly cash dividend of $1.25 per share that shareholders will receive on April 12. However, given the outlook, the company cannot rule out, in my opinion, a dividend hike later in 2022, which could provide strong tailwinds for rising share prices.
Compared to the same metrics, Philip Morris International appears to be trading well as the share price of $93.77 (as of March 16) is below the 50-day moving average of $101.63 and below the 200-day moving average was $98.36.
It also has a price-earnings multiple of 15.96 (versus the industry median of 14.1). While the price-sales multiple is higher than most of its peers (4.63 versus the industry median of 1.81), the stock has a trailing 12-month dividend yield of 5.23%, which looks really good given that the S&P 500 returned just 1.39% on Wednesday.
The 14-day relative strength index of 39 indicates that shares are neither overbought nor oversold.
Wall Street issued a median overweight recommendation rating and has established an average target price of $112.48 per share.
