Impressive 5.7% Yield Dividend Stock Makes a Strong Investment

Impressive 5.7% Yield Dividend Stock Makes a Strong Investment

Global tobacco giant Philip Morris International (NYSE:PM) has been stuck in the mud for five years. The stock has been zigzagging up and down, but is currently at about the same level as it was in 2019.

But that could soon change. The company has worked hard to develop and acquire its next-generation products to drive the growth needed to propel the stock to new heights.

Want to know more? Here’s why Philip Morris is a hot buy today.

Next generation growth

Philip Morris cut its teeth selling Marlboro cigarettes in non-U.S. markets, but it has spent years developing new revenue streams that should ultimately support its business as people smoke fewer combustible products. These are IQOS and Zyn. IQOS is a device that heats tobacco to produce vapor but does not burn the tobacco, thereby reducing the amount of toxins inhaled by users. Meanwhile, Zyn is an oral sachet containing flavored nicotine powder.

The company launched IQOS in 2014 and has built the brand over the past decade. Today, 28.6 million users use IQOS devices. It has accumulated a 9.7% market share of all tobacco consumption in markets where IQOS is available, second only to Philip Morris’ Marlboro cigarette brand. IQOS will soon be launched in the United States, a new market that Philip Morris did not previously have access to. There are around 28 million smokers in the country, so this is a great opportunity to compete with its former sister company. Altriawhich owns the Marlboro name in the United States

Philip Morris bought Swedish Match in 2022 to acquire the Zyn brand. It is the world leader in nicotine pouches, a rapidly growing product category. Trailing 12-month shipping volumes reached 385 million cans in the fourth quarter of 2023, up 62% year-over-year. This volume growth is rare in the nicotine sector, so it is an exciting long-term development for investors.

The company hopes these next-generation products will contribute at least two-thirds of total revenue by 2030, up from 36.4% last year. There are more than a billion smokers worldwide and Philip Morris has a unique combination of leading brands and global market access.

A juicy dividend

Tobacco stocks are known for their high dividend yields, and Philip Morris fits the bill at 5.7%. Certainly, the dividend distribution rate is tight at 101% cash flow, but the company has invested heavily in increasing Zyn’s capacity and sales since acquiring the brand in 2022.

Impressive 5.7% Yield Dividend Stock Makes a Strong Investment

PM Cash Dividend Payout Ratio Table

As cash flow rebounds, this payout ratio should decline. More importantly, investors are unlikely to see a dividend cut. Any company that pays dividends is reluctant to cut its distributions, but management teams in the tobacco industry are particularly reluctant to do so because they know that dividends are the primary reason shareholders hold stock. If necessary, management can leverage the balance sheet to fill any gaps in dividend payments. There was $3.1 billion in cash on the balance sheet at the end of 2023 and the company enjoys an investment grade credit rating.

Stocks are valued for solid investment returns

The best way to profit from owning a stock like this is to buy, hold and reinvest dividends as they come. Dividends will increase over time and investors will also be able to benefit from some price appreciation.

Today, shares trade at a forward P/E ratio of 14, and analysts estimate the company can grow earnings by 7% annually over the next three to five years. Assuming the valuation remains the same, investors could achieve annual returns in excess of 12%. The stock might be a bit pricey; its PEG ratio is 2 and I like to buy stocks when the PEG is 1.5 or less. The PEG ratio tells investors how much they are paying for that company’s earnings growth: the lower, the better.

However, long-term investors should see the company growing at its price. More importantly, in five years or more, Philip Morris could become a cash cow as Zyn’s investments fade and Philip Morris pays down some of its debt.

Potential share buybacks could set the company up for sustained earnings and dividend growth – just rinse and repeat.

Should you invest $1,000 in Philip Morris International right now?

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Justin Pope has no position in any of the stocks mentioned. The Motley Fool recommends Philip Morris International. The Motley Fool has a disclosure policy.

My goodness, this 5.7% dividend stock is a wonderful buy was originally published by The Motley Fool

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