Philip Morris International (NYSE:PM) has been an attractive investment for a long time. With its international focus, it doesn't have to deal with the headwinds that domestic tobacco companies Lorillard (NYSE:LO) and Vector Group (NYSE:VGR) have dealt with recently, including regulatory scrutiny and anti-smoking campaigns.
That international growth potential makes up the core thesis of my premium report on Philip Morris International. Let's take a look at three key areas that you should keep your eyes on as Philip Morris tries to sustain its strong performance into the future.
1. Can Philip Morris take advantage of favorable trends globally?
Investors in U.S. tobacco stocks have had to deal with falling cigarette volumes, with Altria (NYSE:MO) and Reynolds American (NYSE:RAI) having warned of layoffs in response to adverse conditions. By contrast, Philip Morris has huge growth potential, thanks to rising smoking rates in many overseas markets. For instance, a recent international study by a medical journal found that two in five adult men in developing countries smoke or use tobacco. Moreover, women are becoming smokers at younger ages, and although smoking rates among men are as much as eight times higher than for women, growth in women's smoking is also strong, especially in Southeast Asia. China and India pose particularly strong opportunities for Philip Morris, and the company already has a strong foundation in Indonesia and the Philippines on which to build out its regional presence.
2. How far can the dividend rise?
Ever since it gained its independence, Philip Morris has followed in the footsteps of its former parent and raised its dividend faithfully every year. Yet far from simply making token increases, Philip Morris has knocked the dividend ball out of the park, with most recent annual boosts of 10% in 2012 and 20% in 2011.
With payout ratios still below 70%, Philip Morris is in no danger of having to rein in its dividend growth just yet. But if threats like recent new laws in Australia cause the company's income growth to slow, Philip Morris will need to consider making more modest increases to dividend payouts in the future. Watching for changes in dividend policy could give you advance warning of potential threats on the horizon.
3. Will tobacco be the next revolution in vaccines?
Few would think of Philip Morris as having any positive connection to the health-care industry. But tobacco has recently caught on as a potential ingredient in flu vaccines, with the Defense Advanced Research Projects Agency in the U.S. funding research on potential tobacco-based vaccines. With a licensing agreement with the same small Canadian biotech that DARPA has given research funding, Philip Morris hopes to use vaccine development as an end-run strategy aimed at getting into the lucrative Chinese market. If Philip Morris can get its foot in the door in China, it can then hope to eventually challenge state-owned China National Tobacco's dominance in the cigarette industry, where an estimated 350 million smokers represent an enticing target for the tobacco giant.
Fool contributor Dan Caplinger has no positions in the stocks mentioned above. You can follow him on Twitter @DanCaplinger. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.