Shares of Philip Morris International (NYSE:PM) recently popped after the tobacco giant's second-quarter numbers topped expectations on the top and bottom lines. Its revenue dipped 0.3% annually to $7.7 billion, but beat estimates by $280 million.

PMI's adjusted earnings rose 3.5% (15% on a constant currency like-for-like basis) to $1.46 per share, clearing expectations by $0.13. It expects its full-year adjusted EPS to rise about 9% on a constant currency basis, compared to its prior guidance for 8% growth.

A young man smokes a cigarette.

Image source: Getty Images.

PMI's numbers look stable, and the stock trades at just 16 times forward earnings with a forward yield of 5.6%. The market was rough for tobacco stocks over the past year, due to stronger regulatory headwinds in the U.S. and several overseas markets -- but should investors consider PMI to be an undervalued dividend stock at these levels?

Understanding PMI's business

Philip Morris International was spun off from Altria (NYSE:MO) in 2008. The two companies still sell many of the same brands, including Marlboro, but PMI generates most of its revenue overseas, while Altria remains in the U.S.

That split shielded PMI from declining smoking rates in America and allowed it to focus on higher-growth overseas markets. But that growth came at a price, since it exposed PMI to currency headwinds and geopolitical uncertainties.

Moreover, many developing countries are now passing tougher smoking regulations and raising excise taxes on tobacco products. That's why PMI's total cigarette shipments fell 3.6% annually to 183.8 billion units during the second quarter, with all regions except South & Southeast Asia posting year-over-year declines.

However, PMI regularly hikes prices to offset those lower shipments, and it's selling more of its iQOS heated tobacco devices, which heat up sticks of tobacco (called HeatSticks) instead of burning them. Shipments of its heated tobacco products surged 37% to 15.06 billion units during the quarter.

A man snaps a cigarette in half.

Image source: Getty Images.

PMI's key growth metrics

As a result, PMI's revenues rose on a constant currency basis across all of its regions, except Latin America & Canada, during the first quarter.

Region

Q1 2019 sales

YOY sales growth (reported)

YOY sales growth (constant currency)

European Union

$2.58 billion

3%

11.6%

Middle East & Africa

$1.0 billion

(1.8%)

7%

Eastern Europe

$822 million

8.2%

16.6%

South & Southeast Asia

$1.25 billion

8%

10.7%

East Asia & Australia

$1.52 billion

2.9%

4.6%

Latin America & Canada

$527 million

(34.7%)

(32.5%)

YOY = Year-over-year. Source: PMI first quarter earnings report.

Latin America & Canada remains a sore spot for PMI, mainly due to severe inflation and economic downturns in Venezuela and Argentina, as well as big price hikes crushing its demand in Canada. But for now PMI's strengths outweigh its weaknesses, and its reported growth could improve significantly if the dollar weakens.

Like Altria, PMI boosts its earnings growth by cutting costs. Its adjusted operating margin (excluding currency) expanded year-over-year across four of its six markets, boosting its total operating margin from 40% to 41.4%.

But unlike Altria, PMI doesn't regularly boost its earnings with buybacks, since repurchasing shares in U.S. dollars as it generates its revenue in overseas currencies is wasteful. PMI might repurchase shares again when the dollar weakens, but it's not a top priority for the company.

What about its dividend?

PMI raised its dividend every year since it split with Altria. It currently pays $4.56 per share in dividends annually, which represents 92% of its GAAP EPS forecast and 89% of its adjusted EPS forecast for the year. Those payout ratios look a bit high, but they're sustainable.

Altria has a comparable payout ratio but pays a higher yield of 6.5%, and its forward P/E of 11 is lower than PMI's forward multiple of 16. However, Altria arguably faces tougher headwinds in the U.S. market than PMI faces overseas, including new FDA regulations on tobacco and e-cigarettes.

So its PMI an undervalued income stock?

I'm not a big fan of tobacco stocks -- they rely heavily on price hikes, cost-cutting measures, and scattershot investments in adjacent markets to grow their earnings. But PMI is a decent investment, since it's well-diversified and has a booming non-cigarette business in iQOS.

I wouldn't call PMI a bargain at 16 times forward earnings since it's still generating single-digit earnings growth, but its 5.6% yield should set a floor under the stock. Therefore PMI remains a solid dividend stock, but it's not exactly undervalued.