Is This Blue Chip Income Stock a Buy?

When financial markets are especially volatile, income stocks tend to outperform the broader market.

The tobacco giant Philip Morris International (PM 0.65%) has surged around 5% higher year to date while the S&P 500 index has fallen 17% so far this year. This raises the question: Is the stock still a buy after its recent rally? Let’s dive into PMI’s fundamentals and valuation to find out. 

Another quarter of exceeding analysts’ expectations

Philip Morris International reported an excellent first quarter, beating the analyst consensus for both net revenue and non-GAAP (adjusted) diluted earnings per share (EPS). The company recorded $7.7 billion in net revenue in the first quarter, which represents a 2.1% growth rate over the year-ago period. 

The company’s organic growth rate, however, was 9%. This factors in the loss of revenue in the quarter that stemmed from Russia’s invasion of Ukraine. PMI’s net revenue surpassed the average analyst forecast of $7.4 billion for the first quarter.

A person smokes a cigarette.

Image source: Getty Images.

Philip Morris International produced $1.56 in adjusted diluted EPS during the quarter, which was a 0.6% decline over the year-ago period. This topped the analyst consensus of $1.48 for the first quarter, marking the tenth quarter in a row that the company has achieved this feat. And more accurately adjusting for the unfavorable currency translations that took place in the first quarter, PMI posted $1.79 in adjusted diluted EPS, excluding currency. This is equivalent to a 14% year-over-year growth rate. Looking at the next five years, analysts are anticipating that the company will deliver 4% annual adjusted diluted EPS growth.

Those continued growth estimates come even as the company executes on its ambitions to become a majority smoke-free company by 2025. Smoke-free products generated 30.4% of the company’s revenue during the quarter (excluding Ukraine and Russia). Shipment volumes of cigarettes and heated tobacco units (like IQOS, which heats nicotine but doesn’t burn it) edged 4.9% higher to 155.3 billion units in the first quarter. Heated tobacco units grew at an 18.4% year-over-year rate in the first quarter. This explains how heated tobacco units were responsible for 42.6% of the overall shipment volume growth in the first quarter, despite comprising only 12.9% of total shipment volumes.

A secure dividend

The company’s dividend also looks sustainable. The dividend payout ratio is set to be 90.1% in 2022, assuming a token $0.01 increase in the quarterly dividend to be paid in October. The good news is that the tobacco industry has low capital expenditures, so the company should be fine this year. As Philip Morris International bounces back from its dip in adjusted diluted EPS in 2023 and beyond, dividend coverage should be much better.

This is why I believe that the stock will hand out mid-single-digit annual dividend increases in the years ahead. Considering Philip Morris International’s enticing 4.7% dividend yield, that’s a nice combo of income and growth potential. 

The valuation looks sensible

Philip Morris International also appears to be attractively valued. For instance, the stock’s forward price-to-earnings ratio of 19.1 is below the 21.8 average of the consumer staples sector. 

And Philip Morris doesn’t just look like a deal compared to its sector: The stock’s 4.6% trailing-12-month dividend yield is slightly higher than its 10-year median of 4.5%. This makes Philip Morris International a solid stock to buy and hold for the decades ahead. 

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