Philip Morris International (PM +1.55%) has attracted investors with its strong, growing dividends and amazing share-price growth even in the face of multiple global economic crises in the past several years. With the U.S. growing increasingly hostile toward smoking, Philip Morris International has greater potential to draw new customers from across the globe.
That growth potential makes up the core thesis of my premium report on Philip Morris International. But that doesn't mean that the company doesn't have to worry about potential trouble down the road. Let's take a look at some of the specific risks that Philip Morris faces right now.
1. Harsher international regulation
One major reason that many investors prefer Philip Morris to U.S.-focused Altria, Lorillard, and Reynolds American is that by doing business solely in international markets, Philip Morris avoids the hostile U.S. climate against tobacco. Yet Philip Morris has to deal with plenty of regulatory hassles overseas as well.
For instance, Australia recently approved anti-tobacco laws aimed at limiting marketing of cigarettes. The laws, which take effect in December 2012, prevent Philip Morris and other cigarette manufacturers from putting their logos on packaging. Instead, companies will have to package cigarettes in drab olive-green boxes that have pictures showing the effects of mouth and lung cancer and other diseases linked to smoking. With countries from Canada and the U.K. to India and New Zealand watching the issue closely, Philip Morris, British American Tobacco (BTI +0.02%), and other international tobacco companies could face similar regulations around the world if they aren't successful in challenging the laws. That would hurt Philip Morris in particular because of the strength of its brand.
2. A rapid rise in valuation
Philip Morris has seen impressive growth in earnings over the past several years, but its share price has risen at an even faster clip. As a result, shares have gotten a lot more expensive on an earnings-multiple basis, with price-to-earnings ratios climbing from an average of about 13 in 2009 to current levels of 17. Similarly, for income investors, even impressive dividend growth hasn't been able to keep up with prices, and so the company's dividend yield has fallen from more than 5% as recently as mid-2010 to less than 4% today. Philip Morris will have to sustain its healthy growth rate well into the future if it wants to support its growing valuation.
3. Exposure to a rising U.S. dollar against foreign currencies
One of the big drivers of Philip Morris International's growth in recent years has been the weakness of the U.S. dollar against other major currencies, especially the euro and the Japanese yen. Despite occasional spikes upward, the long-term direction of the dollar's movement has been down, and with increasing calls for China to let its currency float freely against the dollar, it appears that there could be even more downward pressure on the dollar.
Nevertheless, the European sovereign debt crisis has exposed weaknesses in foreign currencies as well, and that led to a short-term bounce in the dollar against the euro, hurting Philip Morris International's results. If the dollar's strength persists, then it could hurt growth at Philip Morris, whose financial results are reported in dollar terms.
