Philip Morris (ticker: PM) is a tobacco company that offers a high dividend yield, a solid growth outlook, and on top of that it is trading at an inexpensive valuation. It belongs to the universe of 5%+ yielding dividend stocks.

Company Overview          

Philip Morris produces and sells cigarettes, tobacco, and other nicotine-containing products. It is operating in all geographic areas except for the US, where Altria (ticker: MO) is selling cigarettes. Before the split about 10 years ago the two companies operated as one global tobacco company.

During the most recent quarter Philip Morris reported earnings per share of $1.41, an increase of 24% year over year. This strong earnings growth rate was driven by a 12% revenue increase, as Philip Morris’ top line rose to $7.7 billion.

Growth Prospects      

The tobacco industry is not a high-growth industry. Cigarette consumption is falling in most countries around the globe, but luckily tobacco companies are able to increase the price per package consistently. Demand for cigarettes is very inelastic, which means that price increases do not impact demand a lot. This is how the industry has been able to grow its sales steadily over the last decades, despite smoking rates being on the decline.

Philip Morris’ legacy business (cigarettes) therefore will most likely remain a solid cash cow, where price increases will allow for a slow but steady revenue growth rate. Over the last couple of years Philip Morris has developed a promising new product. Its heat-not-burn product iQOS is a less unhealthy choice compared to cigarettes. iQOS has been successfully launched in markets such as South Korea, Japan, and several European countries, and the ramp-up of sales has been successful. iQOS sales are responsible for the majority of Philip Morris’ current double-digit sales growth rate.

Valuation, Dividends, And Expected Returns

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