Up 6.6% year to date, Phillip Morris International (PM 1.72%) has ducked the bear market that has sent the S&P 500 index down 18% in the same time frame. As a tobacco company, it is resistant to many of the macroeconomic challenges rocking the economy. A reasonable valuation and large dividend yield are the icing on the cake for investors. 

1. What recession?

According to a Reuters poll of economists, the U.S. has a 60% probability of entering a recession in 2023. This is as the Federal Reserve continues to increase interest rates in an effort to calm rampant inflation, which stood at 7.7% as of October. The tobacco industry is somewhat shielded from these challenges because its key product, nicotine, is addictive, and consumers are likely to keep buying it, even when money is tight. 

Tobacco products and U.S. currency.

Image source: Getty Images.

To be fair, tobacco's addictive nature is a double-edged sword because it attracts regulation.

But unlike U.S.-focused alternatives like Altria Group (which has faced significant regulatory challenges related to its investment in Juul Labs), Phillip Morris' geographic diversification shields it from political or economic risk in any specific jurisdiction.

As of the third quarter, the company's cigarette shipment volume is remarkably evenly split across the globe with the E.U., Middle East and Africa, and Southeast Asia each representing roughly a quarter or less of the total. 

2. Building a rock-solid moat 

An economic moat is a competitive advantage a company can use to ensure its market share and profit margins over the long term. For Phillip Morris, this edge comes from its aggressive transition to reduced-risk and smoke-free tobacco products. This pivot can help maintain its customer base (and possibly improve brand perception) in the face of rising concerns about the health risks of traditional cigarettes.  

Management expects reduced-risk products to generate more than 50% of revenue by 2030. And so far, the company has made impressive progress toward making this goal a reality. 

As of the third quarter, smoke-free tobacco products represented 30.1% of Phillip Morris' sales volume. The company's flagship heated tobacco units (HTUs), which release nicotine by heating instead of burning tobacco, saw sales volume increase 17.1% to 27.5 billion year over year. And these products could enjoy continued growth as Phillip Morris moves to commercialize its flagship HTU product, Iqos, in the U.S. market in 2024. 

3. A reasonable valuation 

With a forward price-to-earnings multiple of 18, Phillip Morris International is still valued more cheaply than the S&P 500 average of 20 -- despite handily beating the market this year. While tobacco is no longer a fast-growing industry, the stock is ideal for investors who prioritize stability and safety in this uncertain macroeconomic environment. With a dividend yield of 5%, it's also a good bet for income investors.