With May's inflation rate coming in at 8.6% year over year, interest rates rising, and fears growing that a recession may be on the horizon, the financial news headlines are getting alarming. As such, many investors are feeling as if now would be a good time to move some of their money into steadier investments.
Let's explore three reasons why Philip Morris International (PM -0.22%) fits the bill and could make a good buy in this challenging macroeconomic environment.
1. U.S. regulation is a non-issue
Analysts consider tobacco a recession-proof industry because its products are addictive. People buying cigarettes will likely keep doing so even when money is tight, so investors can expect fairly stable revenues in any economy.
But this characteristic has also attracted aggressive regulatory attention. According to The Wall Street Journal, the Biden administration plans to mandate reductions in the amount of nicotine in U.S. cigarettes -- possibly to non-addictive levels -- over the coming years.
And this month, the Food and Drug Administration (FDA) ordered Juul Lab's vape pens off shelves. While the decision has at least temporarily been blocked by Juul's Federal court appeal, it directly impacts the operations of Philip Morris' U.S. counterpart, Altria Group, which owns a 35% stake in the embattled start-up.
But Philip Morris International's non-U.S. focus shields it from the impacts of American regulation. And while many countries have strict regulations against tobacco, the company's global reach limits the impact of challenges in any specific geography.
2. A diversified business model
Philip Morris also gets diversification from its product lineup. Unlike peers such as Altria, the company has made a massive and successful push into smoke-free and so-called "reduced risk" tobacco products. Smoke-free products now represent 30% of Philip Morris' revenue, and management expects that number to rise to over 50% by 2025.
Altria's flagship smoke-free product is IQOS, a device that heats tobacco without burning it, releasing lower quantities of harmful chemicals than smoking a standard cigarette. As of the first quarter, the heated tobacco units (HTUs) that smokers use in those devices represented almost 13% of Philip Morris's shipment volume (20.1 billion units).
The company is also investing in other products like vaporizers and oral tobacco products. These efforts were bolstered by its May acquisition of Swedish Match (the maker of Snus tobacco pouches) for $16 billion.
Philip Morris has also acquired healthcare companies like Vectura, which specializes in inhalant medication, and Fertin Pharma, which focuses on pharmaceutical chewing gum. These businesses can help the company expand outside of nicotine products while giving it helpful patents that it can use in its efforts to create more reduced-risk tobacco products.
3. A compelling valuation and generous dividend
Philip Morris International's forward price-to-earnings (P/E) ratio of 17.6 is lower than the S&P 500's average of 20. And with its share price up by 6% year to date, it has dramatically outperformed the index, which is down 21% in 2022. The company is also outperforming its U.S.-focused counterpart, Altria, which has fallen by 11% in the time frame.
With a forward P/E ratio of just 9.5, Altria's stock is cheaper -- but the relative premium for Philip Morris is justified by its geographic diversification and its success in the reduced-risk tobacco segment. Its commitment to returning value to shareholders is icing on the cake for investors. At current share prices, its dividend yields 5%. Moreover, in June of 2021, it announced a $5 billion to $7 billion share repurchase program to take place over three years.