Historically, tobacco companies have been among the highest-returning investments in the stock market. According to a Credit Suisse report, tobacco was the best-performing sector of the 20th century.

It's a business that benefits from high profit margins, an addictive product, and relatively little spending on research and development. That profile has made tobacco stocks popular with many income investors, given that they tend to offer increasing dividends, high yields, and return most of their profits to shareholders.

A man lighting up a cigarette.

Image source: Philip Morris.

Philip Morris International's (NYSE:PM) dividend currently yields 5.9% while its domestic counterpart, Altria (NYSE:MO), yields 7.7% -- both well above the S&P 500's average dividend yield of 1.9%.

Still, the ground is clearly shifting in the tobacco industry, and investors may be wondering how safe those stocks are. After decades of market-beating returns, these two stocks have fallen sharply in recent years, as the chart below shows.

PM Chart

PM data by YCharts

A number of factors have contributed to those stocks' decline, including falling smoking rates, competition from vaping products like JUUL, as well as legalized marijuana, and challenges with their own smoke-free products. More recently, health concerns about vaping and heavier oversight from regulators have added to the companies' woes.

Previously, tobacco companies responded to the shrinking number of smokers by raising prices, which allowed them to increase their profits regardless, but that strategy has become more difficult now that vaping has given smokers other options.

The key numbers

The third-quarter earnings report Philip Morris International delivered on Thursday gave investors a window into the company's current position. As cigarette consumption continued to decline broadly, the Marlboro-maker's shipment volume slid 5.9%. Shipments of heated tobacco units -- its next-gen product -- rose 84.8%, but overall units still fell 1.4% on a comparable basis. 

Nonetheless, the company benefited from rising prices and a mix shift toward heat-not-burn products, and revenue rose 1.8% -- or 7% on a comparable, currency-neutral basis -- to $7.64 billion. Adjusted operating income also increased 8% on a comparable, currency-neutral basis to $3.18 billion. Adjusted earnings per share rose 5.9% to $1.43.

The state of the dividend

Philip Morris increased its dividend by 2.6% in the quarter to an annual rate of $4.68 per share, and it has raised its payout every year since it split from Altria in 2008. If one includes its history as part of Altria, Philip Morris investors have gotten dividend hikes every year for more than 50 years. 

However, the modest hikes in recent years seem to signal that investors should mute their expectations -- the payout isn't growing as fast as it did earlier in the decade, nor at a rate comparable to what was common for the pre-split Altria.  Based on its adjusted EPS forecast of $5.14, the company's dividend payout ratio is 91%, meaning nearly all of its profits are going straight to shareholders. Despite the challenges it's facing, the company still expects to deliver a 9% increase in adjusted currency-neutral EPS this year.

The long-term picture

Philip Morris International's earnings continue to grow steadily despite the headwinds it faces, and the decline in cigarette consumption has been slow and therefore manageable for it. Though the stock has been punished in recent years as the company's prospects have begun to look dimmer, in part because of questions about its IQOS product in Japan and elsewhere, the dividend looks safe and reliable for now.

However, the future for Philip Morris and its peers remains murky, and its proposed-and-then-abandoned merger with Altria is just one more indication of how uncertain the future is for these companies. Investors will need to keep an eye on vaping regulations, declining smoking rates, and the success of next-gen products as those factors will heavily influence Philip Morris's results. Though the company's 6% yield looks safe for now, the environment for the industry is changing quickly, and new technologies or regulatory moves could alter the company's future.