Is Philip Morris International a Good Dividend Stock to Buy?

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Tobacco manufacturer Philip Morris International holds a unique advantage over its U.S. peers like Altria Group : Philip Morris caters to markets in the Middle East, Africa, and Asia, which are growing faster than more developed economies.

In addition, tobacco is a highly profitable business and an enviable business model. The product has a very inelastic demand, meaning companies have the pricing power to pass along regular price hikes without much trouble. When you combine this with the fact that Philip Morris does business in high-growth markets, it's rather easy to conclude that Philip Morris is a dividend stock worth buying right now.

New products to help drive growth
Philip Morris is investing in the booming e-cig market, which is a very important step to becoming an industry leader in this new technology, which could help the company remain a strong dividend payer. This year, Philip Morris and Altria agreed to share technology that should help both companies. That makes sense of course, since they were formerly part of the same company. You'll recall that Altria spun off Philip Morris International several years ago.

Philip Morris will provide Altria with two of its heated tobacco products for distribution in the United States. In turn, Altria will license its e-cigarette products to Philip Morris for commercialization outside the United States. And, going forward, each party will cooperate with the other on assessments and product improvements. This is a great move for Philip Morris, since it's still in the early stages of building out its e-cig business.

Compelling potential from emerging markets
One of the best aspects of buying Philip Morris stock is that it's an international company. This includes access to some of the premier emerging markets across the world, including Asia, the Middle East, and Africa, which are growing at higher rates than mature economies like the United States. In addition, these markets offer much less public and regulatory scrutiny than the United States, where consumers are increasingly taking a harsh view of cigarettes and tobacco products.

Smoking is on the decline in the United States, but Philip Morris is seeing shipment volumes hold up better for its flagship Marlboro brand, with the company calling out Marlboro demand in its Eastern Europe, Middle East, and Africa segment. Marlboro's total cigarette shipments increased 1% to more than 73 billion units last quarter. Marlboro is a very strong brand across its key markets. In all, the Marlboro brand itself held 15% of the total international cigarette market outside the United States.

Last quarter, Philip Morris' fastest-growing geography was its Eastern Europe, Middle East, and Africa segment. This geography represents approximately 30% of the company's total revenue. Revenue excluding currency fluctuations increased 13.7% in this unit last quarter, and adjusted operating profit jumped 28.8% year over year. Another high-growth market for Philip Morris International is Latin America, where revenue excluding currency effects increased 11% last quarter.

Exposure to rapidly growing international markets is the reason Philip Morris International is growing faster than most of its U.S.-based counterparts. Last quarter, Philip Morris' adjusted earnings per share, which excludes non-recurring items like asset impairments as well as effects from currency fluctuations, increased 20% year over year. This was much better than Altria's growth rate on the same metric. Altria produced 4.8% adjusted EPS growth last quarter.

Philip Morris generates a lot of cash flow. In fact, it produced $3.5 billion of free cash flow over the first six months of this year, excluding currency effects. Not surprisingly, Philip Morris returns a lot of its cash flow back to investors through its hefty 4.6% dividend yield. Philip Morris distributed 85% of its free cash flow in dividends, which might seem high but is actually in line with competitors like Altria, which also distributes more than 80% of its cash flow.

Pricing power allows for strong growth
The degree to which tobacco companies can increase prices regularly demonstrates what a powerful business it is. Philip Morris realized $494 million of increased revenue due to pricing increases across its markets last quarter. This accounted for most of the company's revenue growth after excluding currency effects, and more than offset unfavorable shipment volumes in certain markets, like Japan.

Because of growth in emerging markets and pricing increases, Philip Morris is going to easily produce growth despite sluggish volumes in a few of its major markets. For the full year, management expects 6%-8% growth of adjusted earnings per share.

Philip Morris International is growing revenue and adjusted profits and is a compelling investment for income investors because of its hefty dividend yield.

Tobacco companies have been highly regarded by income investors for many years because of their generous dividend payouts, and Philip Morris is no exception. The stock yields 4.6% at recent prices, which is well above the dividend yield of the S&P 500. Even better, Philip Morris recently passed along a solid 6% dividend increase.

Growth investors should appreciate Philip Morris as well, because of its solid revenue and earnings growth potential. For all of these reasons, Philip Morris appears to be a high-quality dividend stock investors can confidently buy right now.

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The article Is Philip Morris International a Good Dividend Stock to Buy? originally appeared on

Bob Ciura owns shares of Altria Group. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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