2 Big Reasons To Buy Philip Morris International

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Consumer stocks are now as risky as they've ever been. Unemployment's historically high, consumers are spooked, and subpar earnings abound, as companies pay the price for lost competitive advantage or fiscal irresponsibility. But tough times can offer investors the best chance to buy stocks. 

Even if stock prices are low, investors still need to be careful. Many companies simply won't survive the recession in their current form. However, thinning the herd of weaker competitors should lead to big winners in the consumer space when the economy recovers. I've already highlighted two reasons to sell international tobacco giant Philip Morris International (NYSE: PM). Here, I've listed two reasons to pull the "buy" trigger on this smoking stalwart.

1. My, what a big, safe yield
If you're investing in a large-cap consumer-goods company, you're probably looking for a meaty dividend to supplement what will likely be low-teens profit growth (at best) over the long term. But the simple presence of a dividend is not enough: You want a high absolute yield that's also sustainable through business ups and downs.

In the table below, I've compared Philip Morris International's yield and levered FCF payout ratio to that of U.S.-focused tobacco companies, in addition to the shares of three of the better-known, higher-yielding consumer-staples companies. As an alternative to earnings, I've used levered free cash flow -- the cash that's left over after a company has paid interest on debt, and invested in the ongoing business via capital expenditures. Ratios less than 75%-80% are generally a sign that management is leaving room to meet debt maturities, and to enhance shareholder value through acquisitions or share buybacks.

Company	Dividend Yield	TTM Levered FCF Payout Ratio
Philip Morris International	4.8%	70.6%
Lorillard (NYSE: LO)	5.4%	72.2%
Altria (NYSE: MO)	7.6%	60.6%
Reynolds American (NYSE: RAI)	7.5%	48.6%
ConAgra (NYSE: CAG)	3.7%	493.6%
H. J. Heinz (NYSE: HNZ)	4.2%	83.4%
Procter & Gamble (NYSE: PG)	3.1%	51.2%

Data from Yahoo! Finance and Capital IQ on Oct. 28.

Clearly, Philip Morris International beats out the consumer-staples companies, sporting a higher yield without committing to an overly aggressive payout ratio. The domestic smokes players pretty much trump Big Phil on both factors, but Philip Morris operates only internationally. Thus, as the dollar falls, its profit (and the possibility for meaty dividends) rises. Have you seen the massive decline in the dollar recently?

2. Volumes speak volumes
It's no secret that U.S. consumers are smoking fewer cigarettes. Price increases, smoking bans, and federal and state taxes have taken their toll on demand. The future seems to hold more of the same. In contrast, international smokers are proving more resilient.

Below, I've listed cigarette volume stats for Philip Morris International and four other tobacco players. To be fair, I've included an international peer, British American Tobacco.

Company	Volume Gain/(Loss) in Most Recent Quarter
Philip Morris International	(2.9%) or (4%) excluding acquisitions
Lorillard	(6.3%)
Altria	(16.4%) *
Reynolds American	(11%)
British American Tobacco	2% or (3%) excluding acquisitions

Data from company reports.
* Decline "was estimated to be down about 12% when adjusted for changes in trade inventories."

OK, so Philip Morris International didn't sell the world more cigarettes, but the domestic names fared far worse. As for British American's outperformance, that could be a recessionary effect that will eventually, well, recede. Consider that Philip Morris boasts seven of the top 15 global brands, versus four for its U.K. competitor. In the long run, it's usually easier to innovate and expand on existing brand strength, which should mean good things for Philip Morris shareholders.

What do you think?
We've made our Foolish case on Philip Morris International -- now it's your turn. Do you think shares merit a bold-flavored "buy"? Or do industry risks, even on the international scene, urge you to sell? Share your comments below.

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