Even with the S&P 500's rally in recent weeks, the index is still down 11.6% year-to-date. But consumer staples stocks have fared much better than the broader market.
Shares of tobacco company Philip Morris International (PM 1.41%) have gained almost 5% in 2022. And despite the stock's outperformance, Philip Morris International still looks like it could be a buy for income investors. Here's why.
Adjusted net revenue and earnings keep moving higher
Philip Morris International shared results for the second quarter ended June 30 late last month. And the company exceeded the analyst consensus for adjusted net revenue and non-GAAP (adjusted) diluted earnings per share (EPS).
Philip Morris International recorded $7.8 billion in adjusted net revenue in the second quarter, which was down 0.1% over the year-ago period. But factoring in the stronger U.S. dollar, the tobacco company's adjusted net revenue grew 5.3% year-over-year. This trounced the average analyst forecast of $6.8 billion for the quarter. How did Philip Morris International pull off an adjusted net revenue beat for the 10th quarter out of the last 10 quarters?
Adjusting for the loss of volume in Russia and Ukraine, the company's pro forma shipment volumes edged 3% higher in the second quarter. Due to growing demand for alternatives to traditional cigarettes, which are viewed as less harmful, Philip Morris International's heat-not-burn tobacco product called IQOS further grew its user base during the quarter. Total IQOS users surged 20.3% higher over the year-ago period to 19 million for the second quarter. This led heated tobacco unit sales to increase by 7.4% year over year to 20.1 billion in the quarter.
A 2.4% year-over-year growth rate in traditional cigarette volumes to 143.5 billion was the other component that pushed shipment volumes higher. Along with the stronger pricing power of IQOS over traditional cigarettes, Philip Morris International's adjusted net revenue moved higher in the second quarter.
The company reported $1.48 in adjusted diluted EPS during the quarter, which was a 6.3% decline over the year-ago period. This destroyed the analyst-adjusted diluted EPS estimate of $1.26 for the quarter. And going back to the company's currency headwinds, it gets even better: Philip Morris International generated $1.64 in currency-neutral adjusted diluted EPS, which is a 3.8% year-over-year growth rate.
As a result of the tobacco company's growing smoke-free business, analysts are expecting 2.4% annual adjusted diluted EPS growth over the next five years. This is impressive because it's despite the temporary dip in earnings stemming from Russia's invasion of Ukraine.
The generous dividend is safe
Philip Morris International's dividend yields 5.1%. At first glance, that may seem like a yield trap and too good to be true. But the good news is that that doesn't seem to be the case.
That's because Philip Morris International's dividend payout ratio is projected to be 91.9% in 2022. While this would be an extremely high payout ratio for any other company, it's important to understand that Philip Morris International's business model requires minimal capital expenditures to operate. Dividend growth will likely be low for the next couple of years, but patient investors will be paid handsomely while waiting for dividend growth to accelerate again.
A fair valuation for a wonderful business
Philip Morris International is a fundamentally solid company. And the valuation doesn't appear to be too steep either.
The stock is trading at a forward price-to-earnings (P/E) ratio of 16.5. For context, this is slightly lower than the tobacco industry average forward P/E ratio of 17.3. This is precisely why Philip Morris International could be a great consumer staples stock to buy and hold during a recession.