There are countless quotes that are often referred to in the investment community. But out of all of them, the following quote attributed to Berkshire Hathaway's Warren Buffett is arguably the most profound of them all: "If you don't find a way to make money while you sleep, you will work until you die."
Owning companies that consistently pay dividends to shareholders is one common way that investors can generate the passive income needed to not have to work just for the sake of paying bills. As the largest tobacco company on the planet, Philip Morris International (PM 1.39%) is a dividend stock loved by many income investors. But is the company a buy at its current $98 share price? Let's dive into its fundamentals and valuation to get an answer.
Executing on its goal of a smoke-free future
Philip Morris International is synonymous with the global tobacco industry. The company is known for five of its brands being among the top 15 best-selling cigarette brands. Philip Morris International has successfully grown its heat-not-burn brand named Iqos into the leading player within the reduced-risk tobacco product category.
Image source: Getty Images.
This explains how Philip Morris International sold a mind-boggling 731.1 billion units of total shipment volume in 2022. Put another way, that is more than 23,000 units every single second of the year.
The tobacco company's net revenue edged 3.5% higher year over year to $8 billion in the first quarter ended March 31. This was despite a 6.1% foreign currency translation headwind, which was due to Philip Morris International's significant international presence and the stronger U.S. dollar.
The company's total cigarette and heated tobacco unit (HTU) shipment volumes fell just 1.1% for the first quarter. Philip Morris International's cigarette shipment volumes declined 3.1% over the year-ago period to 143.7 billion during the quarter. This was nearly offset by a 10.4% growth rate in the company's heated tobacco units to 27.4 billion in the quarter. Philip Morris International's slight volume decline, coupled with a 4.4% increase in net revenue per unit, pushed net revenue higher for the quarter.
The company's HTU share of net revenue expanded by 340 basis points to 34.9% of net revenue during the quarter. As more smokers seek less-harmful alternatives to cigarettes, it's reasonable to expect more consumers to switch to these higher-margin products for Philip Morris International.
The company's adjusted non-GAAP (generally accepted accounting principles) diluted earnings per share (EPS) dipped 4.4% year over year to $1.38 in the first quarter, excluding currency headwinds. Philip Morris International's higher net revenue was more than offset by higher expenses for the quarter. This caused the company's non-GAAP operating income margin to fall by 630 basis points over the year-ago period to 37.3% during the quarter. That's how Philip Morris International's adjusted diluted EPS growth lagged its net revenue growth in the quarter.
But the good news for shareholders is that as the company builds its share of smoke-free revenue, analysts are expecting 6.9% annual adjusted diluted EPS growth over the next five years.
A safe, market-crushing payout
Philip Morris International's 5.2% dividend yield is three times higher than the S&P 500 index's 1.7% yield, yet it doesn't appear to be too good to be true or a yield trap.
This is because it is anticipated that Philip Morris International's dividend payout ratio will come in at approximately 81% for 2023. Since tobacco companies don't require huge capital expenditures to operate, this leaves the company with enough funds to entertain growth opportunities, repay debt, and repurchase shares.
The valuation is enticing
Philip Morris International is a great company with tremendous fundamentals. Surprisingly, the stock is currently trading at a modest valuation.
Philip Morris International's forward price-to-earnings (P/E) ratio of 14.2 is below the tobacco industry's average forward P/E ratio of 15.7. This is why I believe shares of the stock are a buy for investors seeking a combination of high starting income and moderate future dividend growth.
