Is This Blue Chip Income Stock A Buy?

When financial markets are particularly volatile, income stocks tend to outperform the market as a whole.

The tobacco giant Philip Morris International (PM 0.65%) increased by around 5% since the beginning of the year, while S&P500 the index has fallen 17% since the start of the year. This begs the question: is the stock still a buy after its recent rally? Let’s dive into the fundamentals and valuation of the PMI to find out.

Another quarter to beat analysts’ expectations

Philip Morris International reported a strong first quarter, beating analyst consensus for net sales and non-GAAP (adjusted) diluted earnings per share (EPS). The company reported net revenue of $7.7 billion in the first quarter, representing a growth rate of 2.1% over the prior year.

The company’s organic growth rate, however, was 9%. This takes into account the loss of revenue for the quarter resulting from Russia’s invasion of Ukraine. PMI’s net revenue exceeded the average analyst forecast of $7.4 billion for the first quarter.

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Philip Morris International generated $1.56 of adjusted diluted EPS in the quarter, down 0.6% from the prior year period. That topped the analyst consensus of $1.48 for the first quarter, marking the tenth consecutive quarter the company has achieved the feat. And adjusting more specifically for the unfavorable currency translations that took place in the first quarter, the PMI showed $1.79 of adjusted diluted EPS, excluding currency. This equates to a 14% year-on-year growth rate. Looking ahead to the next five years, analysts expect the company to post an annual adjusted diluted EPS growth of 4%.

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

A secure dividend

The company’s dividend also looks sustainable. The dividend payout ratio is expected to be 90.1% in 2022, assuming a nominal $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 business should do well this year. As Philip Morris International rebounds from its Adjusted Diluted EPS decline in 2023 and beyond, dividend coverage should be much better.

That’s why I think the stock will distribute mid-single-digit annual dividend increases in the years to come. Given Philip Morris International’s attractive 4.7% dividend yield, this is a nice combination of income and growth potential.

The valuation seems reasonable

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

And Philip Morris doesn’t just look like a bargain relative to its sector: the 12-month dividend yield of 4.6% is slightly above its 10-year median of 4.5%. This makes Philip Morris International a solid stock to buy and hold for decades to come.

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