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I'm excited to recommend and open a position in Philip Morris International (NYSE: PM).

The business
Philip Morris is unique in that it is an American company that earns 100% of its revenue from outside the U.S. It sells cigarettes around the world -- with 40% of its sales coming from the European Union, 24% from EMEA (Eastern Europe, the Middle East, and Africa), 22% from Asia, and 12% from Latin America and Canada. Its brands have been ingrained in people's minds through years of advertising, allowing the company to charge more for its products. Combined with an addictive product, this brand strength means Philip Morris will be a market leader for years to come.

Why buy?: Dominant business ...
Philip Morris is the most powerful tobacco company in the world, with seven of the world's top 15 brands, including top-seller Marlboro. The company has an estimated 27% market share in its world markets -- excluding China, where only government-owned China National Tobacco is allowed to operate, and the U.S., where the company's former parent, Altria (NYSE: MO), is dominant.

Philip Morris' largest competitors are British American Tobacco (NYSE: BTI), Imperial Tobacco Group, and Japan Tobacco.

... With a large moat ...
There are significant barriers to entry in the tobacco industry. There are heavy regulations which vary significantly from country to country. The positive side is that some of these regulations help keep Philip Morris entrenched as the market leader. For example, regulations to ban displays of cigarettes are a boon for the company as consumers are more likely to go with a brand they can name rather than asking about other brands. This mind share allows Philip Morris to charge more for its products, leading the company to have absurdly high margins. It's 41% operating margins are far superior to competitors British American Tobacco at 33%, Imperial Tobacco at 20%, and Japan Tobacco at 15%!

... Cash cow!
In the past three years, Philip Morris has produced nearly $23 billion in free cash flow and increased its dividend every year. The company used that cash flow as well as some debt ($9.2 billion in the past three years) to create value for shareholders. With that $32 billion, the company:

  1. Used $16 billion for share repurchases, which have reduced the share count 16% since the company's spinoff in 2008. Among tobacco companies, only Lorillard (NYSE: LO) has been able to keep up with that level of share repurchases.
  2. Distributed $14 billion to shareholders as dividends. Note, the firm's dividend has increased every year, from $1.84 in 2008 to $2.56 in 2010.
  3. Spent $2 billion on acquisitions, increasing the firm's market share around the world and taking full control of some joint ventures and partially owned subsidiaries.

The risks
As with all investments, there are dangers to face. Philip Morris generates 40% of its sales in the European Union. Economic weakness and increasing unemployment there has led to people smoking less. Also a risk, the company is highly leveraged, with a debt/equity ratio of 3.2:1. The company's cash flow is more than enough to handle all interest payments, but it is still something to be aware of. The company has litigation risk, although the industry has dealt with that for years.

I'm buying $1,000 worth of shares of Philip Morris tomorrow. At its current price, the company isn't particularly cheap, but its status as a market leader with a solid dividend will make Philip Morris a long-term winner for years to come.

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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.