With the Fed projecting U.S. inflation to exceed 4% in 2021, now is a great time to take a closer look at value stocks. These companies' valuations tend to be less dependent on low interest rates or discounted future cash flows. And their better-than-average dividend payments can help offset the declines in the dollar's value.

Philip Morris International (NYSE:PM) and Dollar General (NYSE:DG) are two companies whose stock could make excellent investments in this uncertain environment. 

Cigarettes protruding from a cigarette box with dollar bills in the background.

Image source: Getty Images.

1. Philip Morris International

Philip Morris International (PMI) is a tobacco giant focusing on markets outside of North America, which helps lessen the impact of regulatory risk and economic headwinds in any particular country. Its dirt-cheap valuation, healthcare investments, and pivot to reduced-risk products make it a potentially excellent choice for investors. 

PMI's second-quarter net revenue jumped 9.1% year over year to $8.1 billion, powered by heated tobacco unit (HTU) sales, which made up 13% of shipment volume (69.6 billion units). Smoke free-products (which include HTUs, vaporizers, and oral tobacco) now represent roughly 29% of PMI's revenue. And the company is well on its way to achieving its ambition of having 50% of its revenue come from smoke-free products by 2025.  

PMI's reduced-risk transformation is key to both its customers' health and its bottom line. Analysts at Broyhill Asset Management expect operating margin (currently 45%) to increase by 100 to 200 basis points annually as IQOS, its flagship reduced-risk product, gains market share. The $1.4 billion acquisition of pharmaceutical inhalant maker Vectura could also help PMI develop more industry-leading reduced-risk tobacco products by giving it access to more patents. 

With a forward price-to-earnings (P/E) multiple of 14, PMI is valued higher than its U.S. counterpart, Altria, which trades for just 10 times forward sales. But with PMI's margin-boosting transition to reduced-risk products and geographic diversification, the premium is well deserved. The stock's current dividend yield of 5% on a $1.25 per-share payout is icing on the cake.

Green upward arrow on top of a $100 bill with a grid on it.

Image source: Getty Images.

2. Dollar General

With its focus on low-priced consumer staples, Dollar General is well-positioned in this inflationary environment. The company's expansion into healthcare could boost its economic moat and make investors smile all the way to the bank. 

Inflation is a double-edged sword. The good news is that higher prices spur shoppers to switch to discount retailers like Dollar General, but higher production costs will make it harder for them to maintain low prices. However, unlike rivals such as Dollar Tree, Dollar General won't pass the higher costs to consumers. Instead, management said the company plans to keep prices low by changing its product mix -- a strategy that could set its stores apart in thrifty consumers' minds. 

Dollar General is also leveraging its proximity to underserved communities to expand into synergistic opportunities. Management has said it wants select stores to become a healthcare destination by offering telemedicine and prescription services in rural zip codes. Dollar General is at the beginning stage of this pivot, but according to CEO Todd Vasos, the transition could be a "really big deal" for the company's top and bottom lines. 

Management is guiding for EPS of up to $10.20 for full-year 2021, which would represent a 24% annual growth rate. The guidance gives the company a forward P/E multiple of 22, which is significantly lower than the S&P 500's average P/E of 30. Dollar General returns value to investors through a share buyback program expected to total $2.4 billion this year. The company's dividend of $0.42 per share per quarter yields only 0.76%, which seems low, but that's mostly because the stock price has appreciated 225% in the past five years.

Betting on value

With their rock-bottom valuations and inflation-resistant business models, Philip Morris International and Dollar General look positioned for success. Both companies are also exploring synergistic opportunities for expansion, which could help power their next leg of long-term growth.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.