Philip Morris International Inc. (PM -1.44%) is a world-renowned company, offering millions of customers across the globe its line of tobacco products that include the well-known Marlboro brand. Recently, as Philip Morris has emphasized alternative products over cigarettes, investors have prepared for what could be a transformation for the tobacco giant's business.
To evaluate whether a stock is a buy, it pays to look at the company's growth prospects and financial condition, along with current valuation and dividend payouts. Below, we'll take a closer look at Philip Morris to see whether it has what it takes to justify purchasing shares right now.
Philip Morris has had difficulty in keeping its top line moving higher recently. Although the company's revenue grew 7.7% in 2017, it's been contracting at a 1.7% annual rate over the past five years.
Much of the challenge that Philip Morris has faced has come from foreign exchange markets. The multinational does all its business outside the U.S., and that requires it to take revenue in the currencies of the countries in which it does business. In recent years when the U.S. dollar was strong, those foreign currency receipts translated into fewer dollars, weighing on sales figures. More recently, the dollar has started to give up ground, contributing substantially to revenue gains over the past year. Yet some concerns still center on declining cigarette shipment volumes, reflecting the general attitude among smokers that quitting is still a laudable goal and one worth achieving. Overall, Philip Morris will keep facing growth challenges even if a weaker dollar helps boost its numbers temporarily.
Philip Morris has also seen its financial condition grow slightly more precarious. In the past six years, total long-term debt has more than doubled, and shareholder equity has been negative since 2011.
That trend has largely stemmed from the need to use most of the company's free cash flow to cover dividend payments. As a result, whenever Philip Morris needs to make other investments in its business, it generally has to increase debt to do so. With recent moves like building and refitting production facilities to allow for greater output of iQOS-related products, Philip Morris has needed money available, and that has helped contribute to the upward movement in outstanding debt. As interest rates rise, that could become an increasingly big problem for Philip Morris.
Philip Morris stock isn't cheap right now. The company currently fetches about 24 times its normalized earnings, and even when you incorporate future-looking earnings projections, forward multiples approaching 17 don't indicate the biggest of bargains in today's market environment.
However, in terms of the stock's history, current multiples are the lowest they've been in some time. You have to go back to late 2014 and early 2015 to find forward multiples at current levels, with the stock having traded much more richly in the time in between. That makes Philip Morris closer to a buy now than it's been for a while, even if it isn't the screaming bargain investors would prefer to see.
Dividends have always been a draw for Philip Morris investors. The current yield of 4.4% is impressive, more than doubling the overall market's average dividend yield, and annual dividend growth at a 5.4% clip since 2012 is encouraging as well.
However, a closer look shows some negative trends with dividends. After giving shareholders dividend increases in double-digit percentages throughout much of the late 2000s and early 2010s, dividend growth has slowed to the 2% to 3% range over the past few years. Some hope that a falling dollar will help support faster payout growth, but it'll likely take a while for Philip Morris to catch up in a favorable currency environment before it can return more in dividends.
Overall, Philip Morris has enough question marks that it isn't really a strong buy right now. As its transformation from a cigarette giant to an alternative-products pioneer continues to take hold, investors should be prepared to see clearer signs about whether Philip Morris can emerge from its recent funk and take steps to strengthen the company going forward.