Among tobacco stocks outside the U.S. market, Philip Morris International (NYSE:PM) remains a global force, with the highest market share of any non-state owned publicly traded company.While shareholders have enjoyed solid dividends from the company for years, Philip Morris has stopped delivering the capital appreciation the stock saw from its start as a separate publicly traded entity into 2012.
With share prices unchanged from the beginning of 2013, smart investors are asking whether Philip Morris is a bargain in a rising stock market, or if the challenges to the cigarette industry around the world will take their toll on the tobacco company's future. Let's take a closer look at Philip Morris International to see whether now is the time for investors to commit new capital to the stock.
China joins the regulatory battle
One key issue facing Philip Morris International is the extent to which foreign governments mimic the intense regulatory scrutiny that cigarettes and other tobacco products get in the U.S. For a long time, investors believed the major appeal of Philip Morris, as compared to domestic giants Altria (NYSE:MO) and Reynolds American (NYSE:RAI), was that emerging-market countries would be slower to impose sales-stifling regulations on the industry, allowing the natural growth curve to continue further into the future.
Those beliefs have largely turned out to be overly optimistic, and the latest proof comes from China. Last month, China's State Council suggested a ban on indoor smoking as part of broader draft rules on the use of tobacco nationwide; the public comment period will run for another two weeks. Additional regulations would limit portrayals of tobacco use on television and in movies. As in the U.S., China relies on the substantial tax revenue that tobacco products generate, but government officials are also aware of the health care costs that tobacco use imposes on the country. Earlier this week, Chinese officials also added the possibility of boosting taxes on cigarettes, as many smokers in the nation now pay some of the lowest prices in the world, less than $1 per pack.
China's regulations won't have a material impact on Philip Morris' sales simply because the company doesn't do any significant amount of business within the emerging-market giant. The government-controlled China National Tobacco Corp. has a near-monopoly on tobacco sales within the nation. Philip Morris inked a decade-long deal with CNTC in the mid-2000s to allow sales of Marlboro in China, but the deal has not produced substantial revenue for the company. For its part, the government bureau that controls CNTC spoke out against the proposed tobacco regulations, but the success of such measures in other countries suggests public support could fall in favor of greater restrictions.
China has enough influence that smaller countries will likely follow its lead in their own regulatory efforts. For instance, Indonesia and the Philippines have implemented their own regulations in recent years, but a stronger Chinese ban could reinvigorate anti-smoking efforts there as well. If that happens, then markets in which Philip Morris has a much larger presence could start seeing the same growth headwinds, and that could further stifle overall earnings and revenue and keep the stock locked in its stagnant state well into the future.
Will Philip Morris International's dividend push the stock higher?
Even with the pace of Philip Morris International's growth in question, one of the stock's greatest attractions is its dividend. With a yield above 4.5%, Philip Morris is still among the best dividend payers in the U.S. stock market.
As 2015 approaches, though, dividend stocks with relatively weak growth prospects will have to deal with a new threat: imminent interest rate increases from the Federal Reserve. Low-growth dividend stocks often behave much like bonds in rising-rate environments, with their prices decreasing in order to keep their yields in line with what investors can get from lower-risk investments in the fixed-income arena. Falling interest rates certainly played a role in Philip Morris International's upward move from 2008 to 2012, so it's logical to expect downward pressure when rates do begin to rise.
Philip Morris' advantage over bonds, though, is that its dividend has risen over time. Yet even there, the company's recent 6% dividend increase was smaller than the roughly 10% hikes that Philip Morris gave shareholders in past years. With the company forced to raise prices to offset falling cigarette sales volumes, Philip Morris investors must consider the possibility of further slowing in dividend increases in 2015 and beyond.
Is Philip Morris International worth buying?
Even though Philip Morris stock has not gone anywhere lately, it also has not fallen substantially. With shares still fetching about 17 times expected earnings, the company isn't terribly expensive, but its price reflects the relative value of its dividend. Without further movement on the cigarette-alternative front, Philip Morris could stay stuck in the doldrums for a while longer.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.