All investors strive for financial peace of mind. This can be achieved by growing the passive income that a portfolio provides to a level that is above monthly household expenses.
My favorite vehicle to generate passive income is dividend growth stocks. That is because a basket of well-selected dividend growth stocks can maintain or improve an investor's standard of living over time through payout increases.
The tobacco giant Philip Morris International (PM 0.31%) has grown its dividend for 14 consecutive years. This raises the following question: Is the stock still an attractive buy for yield-oriented investors? Let's dig into Philip Morris International's fundamentals and valuation to answer this question.
An enviable product portfolio is fueling robust results
Philip Morris International's $155 billion market capitalization makes it nearly as large as its next two competitors combined. This isn't shocking when you consider that the company owns five of the world's top 15 cigarette brands, led by Marlboro. This is how Philip Morris International built its worldwide consumer base to a whopping 150 million.
The tobacco company recorded $8.2 billion in net revenue for the fourth quarter ended Dec. 31, 2022, which equates to a 0.6% year-over-year growth rate. And these results were even better than they initially appear: As a global business, Philip Morris International faced a 6.9% foreign currency translation headwind in the quarter due to the strong U.S. dollar.
The company's total volume edged 1.2% higher over the year-ago period to 186 billion units during the fourth quarter. As more consumers are looking to quit smoking or shift to potentially less harmful alternatives, Philip Morris International's cigarette volume dipped 2.8% year over year for the quarter. But this was easily made up for by a 26.1% surge in heated tobacco units to 32 billion in the quarter.
Because of the exceptional demand for heated tobacco units, this product carries more pricing power than cigarettes. That explains how net revenue per unit increased 6.2% over the year-ago period during the fourth quarter. As the share of smoke-free products grows from 36% in the most recent quarter, this should act as a growth catalyst for Philip Morris International moving forward.
The company's diluted earnings per share (EPS) shot up by 14.9% year over year to $1.54 for the fourth quarter. Philip Morris International's tight cost management in the quarter helped its net margin to expand by 360 basis points over the year-ago period to 29.4%. Along with a 0.3% reduction in the company's outstanding diluted share count, this is how diluted EPS growth far outpaced net revenue growth during the quarter.
Philip Morris International's unmatched brand portfolio has analysts projecting that the company will deliver 3.9% annual diluted EPS growth through the next five years.
Image source: Getty Images.
The dividend could keep rising
Stacked against Philip Morris International's 5.2% dividend yield, the S&P 500 index's 1.7% yield pales in comparison. And if the high starting income isn't enough for investors, the company is also a proven dividend grower: Philip Morris International's quarterly dividend per share has rose by almost 50% in the last 10 years. Modest dividend growth also appears poised to continue in the future.
PM Dividend data by YCharts
This is because it is projected that Philip Morris International's dividend payout ratio will come in just above 80% in 2023. That leaves the company with a big enough buffer to invest in future growth and strengthen its balance sheet to sustain the dividend. This is why I believe Philip Morris International's annual dividend growth over the long haul will be around 3% to 4%, which makes for a nice pairing of starting income and future income.
A discounted valuation
Philip Morris International is a fundamentally promising business. Yet the stock's valuation doesn't fully reflect its quality.
Philip Morris International's forward price-to-earnings (P/E) ratio of 14.3 is moderately below the tobacco industry average forward P/E ratio of 16.1. This arguably makes the stock a great pick for dividend growth investors.
