Tobacco stocks have often inspired a mix of fear and greed among investors, as the industry has produced immense profits but also faced major risks and challenges. Philip Morris International (PM 1.21%) in particular has had to deal with a wide variety of regulatory environments worldwide, but it has worked toward aiming to reduce health risks for its customers through innovations like the iQOS heated-tobacco product and other modified-risk offerings.
For investors, Philip Morris stock has risks of its own. Between currency fluctuations, a slowdown in dividend growth, and the general threat of a downturn in the stock market, Philip Morris shareholders need to be comfortable with the possibility of adverse performance in the future.
Image source: Philip Morris International.
1. Foreign exchange risk
Philip Morris is unusual because even though it's based in the U.S., it does all of its business abroad. That means that Philip Morris reports its financial results in U.S. dollars, but for the most part, it collects nearly all of its revenue in other currencies.
Fortunately, over the past year currency risk has let up dramatically at Philip Morris. During 2015, the strong U.S. dollar cost the tobacco giant about $1.19 per share in earnings. Yet in 2016, that adverse impact declined to just $0.43 per share, and the dollar appears to have plateaued so far this year. That should lead to even less pressure in the near term on Philip Morris' financials.
Nevertheless, investors need to be aware of currency risk ahead. With its large exposure to the euro, various Eastern European currencies, and Asian currencies such as the Japanese yen, Philip Morris will have to work to protect itself from strong-dollar hits to its bottom line.
2. Decelerating dividend growth risk
Investors like Philip Morris International for its dividend. The company has boosted its payout every year since it became a separately traded public company, and its current yield of 3.4% is well above what you'll find among larger companies throughout most of the stock market.
However, Philip Morris has seen its dividend growth slow in recent years. Early in its existence, shareholders could count on Philip Morris to deliver double-digit-percentage dividend increases each and every year. Yet when the strong dollar started to rear its ugly head, dividend growth began to slow. After just a 6% rise in 2014, Philip Morris has had to content itself with 2% dividend increases in 2015 and 2016. Most investors don't expect a big change when the tobacco company makes its decision about dividend increases in 2017, as earnings growth concerns independent of foreign currency impacts have also weighed on Philip Morris' ability to sustain faster dividend gains.
3. Stock market risk
Finally, it's important to understand that Philip Morris' recent share-price success comes in the context of an eight-year bull market. Most stocks get support from a favorable market, and they typically fall when market pressures send major benchmarks downward.
The market metric known as beta helps measure a stock's sensitivity to market movements. Philip Morris' beta is 0.91 right now, and that suggests that although the stock is a little less volatile than the market as a whole, it will still likely see significant declines if the stock market as a whole turns downward.
One thing to keep in mind with Philip Morris is that its global scope leaves it potentially vulnerable to market disruptions outside the U.S. as well. So far, most major international stock indexes have performed reasonably well, mimicking the rise in U.S. stocks. But if a divergence happens, then investors should pay close attention to Philip Morris to make sure it doesn't underperform its more domestically focused peers.
Philip Morris International has plenty of other risks to deal with, but these three are especially important in defining whether the company is a good investment. By remaining aware of these risks, you can better evaluate the tobacco giant's results and make an informed investment decision.
