Cigarettes: Business Is Still Smoking

The recession-proof cigarette industry continues to out-smoke other equity options in dividends and capital gain potential. In the cigarette industry, clients are highly addicted, profit margins are thick, and in the case of Philip Morris International, the potential for earnings grows as the economy sputters. Phillip Morris International (PM) offers an excellent high-dividend, anti-dollar investment, and the stock is currently trading near its lows.

A Long, Profitable History

Although the international and domestic divisions of Phillip Morris have since split with Altria (MO), the combined company was perpetually the best dividend stock on Wall Street. Even today, Philip Morris pays a substantial 6.1% dividend yield to its investors, which, in these days, is higher than most bond funds. Dually, Philip Morris gives back to stock investors through capital gains.

Why PMI?

Philip Morris International does not conduct business in the United States, which inevitably keeps the company’s bottom line safe from the biggest expense for Big Tobacco: lawsuits. Over the years, the US-division lost multi-million and billion dollar lawsuits that slowly ate away at corporate profits.

Today, the international division is much safer, including only sales from the global markets, where its products reign supreme. The fight against tobacco in the US is met with growth in the smoking market everywhere else in the world, namely in emerging markets like China, India and Eastern Europe.

The Anti-Dollar Play

Although the US dollar has remained particularly strong through the recent recession, most of its strength could be attributed to investors buying into “safe” assets such as Treasuries and money markets. To purchase these investments, investors would have to liquidate a portion of their equity portfolios back into dollars, causing a spike in the dollar’s value. On the longer term horizon, it appears now that the dollar is topping, and a falling dollar is excellent for Philip Morris’ main business.

How It Works For You

Since the company operates and reports earnings in the United States, but conducts its business overseas, the profits that come back to America can be multiplied or minimized by changing exchange rates. Were the US dollar to lose some 30% of its value, the amount of 30% would be ADDED to the profits rather than subtracted. In this case, Philip Morris needs neither organic growth nor any costly expansion to grow profits; it only needs time to find a reasonable value for the US dollar.

Stock position: None.

Comments

[livesinhiscar:]

Why is PMI safe from lawsuits?
Don't they have lawyers in other countries too?
I think there is much litigiation and lawsuits in the future for PMI.
Why would there only be tobacco lawsuits in one country in the world?

Feb 26 08:18 AM

[Chirag Amin:]

PMI's legal exposure is minimized due to two main reasons:

1. Philip Morris has learned much from previous lawsuits.....many warnings appear on their cigarettes. They know how to safeguard themselves.

2. The U.S. has perhaps the most liberal court system in the world....what other nation would allow the types of tobacco lawsuits that we've seen proceed forward....no one is putting a gun to people's heads to smoke

Combine this with the fact that Philip Morris would be able to 1) openly advertise their product in other nations (e.g., TV commercials, etc.) and that 2) they would be able to sell to minors and that alone speaks volumes of their business model.

Bottom Line: If you are stupid enough to smoke, then you should own up to the destruction that it causes to your body....People in other countries can't blame Philip Morris for lung cancer just as they can't blame McDonald's for making them fat and giving them heart disease.....Courts can't shield people from stupidity.

Feb 26 03:31 PM

[Teak:]

Yeah, yeah, let's hear some more negative warnings about the threat of lawsuits. Keep that stock price low!! I want my reinvested dividends to buy more shares each quarter. I can't do that if the stock price goes up.

As someone who lives outside the USA, I know that few countries are concerned right now about suing tobacco companies. Those prime ministers, and members of parliament, are too worried about other things: political rivals, or finding new mistresses, as they sit and puff on their cigarettes and drink their tea.

Feb 26 06:00 PM