It's no secret that dividends are not only a big chunk of the average investor's annual returns. Not only that, but companies that are able to consistently raise their dividends for years on end are surefire ways for investors to build long term wealth. Such has been the case with cigarette maker Philip Morris International (NYSE:PM)
(NYSE:PM)But increasingly, public sentiment throughout the world has turned against smoking, and this can't be good for the tobacco trade. Currently the company's dividend is relatively generous, but there are some question marks wafting in the haze of its future.
Smoke 'em if you got 'em
For a firm manufacturing an increasingly unpopular product, Philip Morris isn't doing too badly. In its most recently reported quarter, total cigarette volume fell. That was to be expected. But the drop was fairly light, at 0.4% on a year-over-year basis.
Revenues are growing (if slightly, by 3%), and the company continues to rake in plenty of cash. This has always been a hallmark of the tobacco industry -- once cigarette-making assets are onstream, very little innovation needs to take place to enhance the product. A Marlboro bought this morning isn't vastly different than the product sold decades ago.
Meanwhile, on the consumer end, most users are effectively addicts. This goes a long way toward ensuring that they'll continue to buy cigarettes at whatever price they're sold for. So tobacco companies are classic cash cows. Their costs are low and their profits high, leaving plenty of cash in the coffers, certainly more than enough to pay a hefty dividend (which Philip Morris recently raised to a quarterly $1 per share, yielding 4.6%).
Flicking the ash away
But the simple fact is that tobacco's day is probably done. Globally, cigarette consumption by volume is declining. Awareness of the risks of smoking is very high and often impossible to ignore; just look at the dire official health warnings written directly onto cigarette packs in most major markets.
So in all likelihood, those volumes are probably going to continue to drop. And as they decline, revenue will follow, as will bottom lines. In Philip Morris' case the latter has been falling off recently, sliding 8% in the firm's most recently reported quarter. Although the profit slump is not alarming yet, it's beginning to look like a trend:
The firm seems acutely aware of this. It's trying to broaden its product selection by making a new push into the cigarette alternatives market. The company is rolling out iQOS, which sounds like a cell phone operating system but is actually a smokeless tobacco device, a battery-operated product that heats, rather than burns, tubes of tobacco known as Marlboro HeatSticks (which retail for about the price of a pack of traditional Marlboros).
It's a snazzy-looking product, but can it restore meaningful growth to Philip Morris? The alt-cigarette market is crowded by a score of products, and the once-rapid growth of the segment is leveling off significantly. As such, the long-gestating, expensive to develop iQOS doesn't seem like the golden lighter that will spark the company's future success.
That isn't to say that Philip Morris is in immediate trouble. In spite of those scary warnings printed on their cigarette packs, smokers will continue to puff away while the company rakes in money and keeps exhaling a dividend. So for the short- to mid-term, that chunky payout probably isn't at too much risk.
The longer term, however, is a different story. Cigarettes as a product clearly don't have much of a future, and the prospects for Philip Morris' alternatives don't look great, either. This Fool would bet that the firm will continue to maintain or even increase its dividend over the next few years. But as the tobacco market really starts to vaporize, its payout will follow suit.
Eric Volkman has no position in any stocks mentioned. Nor does The Motley Fool. 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.