OMG, this stock with a 5.7% dividend yield is worth buying

global tobacco giant Philip Morris International (NYSE:PM) It has been stuck in the mud for five years. The stock has been up and down, but is now roughly where it was in 2019.

But that may soon change. The company has been working hard to develop and acquire next-generation products to drive the growth needed to reach new heights in its stock price.

Want to know more? That’s why Philip Morris is such a hot stock today.

The next generation grows

Philip Morris has just started selling Marlboro cigarettes in non-U.S. markets, but it has spent years developing new revenue streams that should eventually shore up the business as people smoke fewer combustible products. These are IQOS and Zyn. IQOS heats tobacco to produce vapor but does not burn the tobacco, thereby reducing the amount of toxins users inhale. Zyn, meanwhile, is an oral pouch containing flavored nicotine powder.

The company launched IQOS in 2014. After ten years of building the brand, 28.6 million users now use IQOS devices. It has a cumulative market share of 9.7% of all tobacco use in markets where IQOS is sold, second only to Philip Morris. Marlboro cigarette brand. IQOS is about to launch in the United States, a new market that Philip Morris has previously been unable to enter.There are an estimated 28 million smokers in the country, so this is a great opportunity to compete with its former sister company Altriaowns the Marlboro brand in the United States

Philip Morris acquired Swedish Match in 2022, acquiring the Zyn brand. The company is the global leader in nicotine pouches, a rapidly growing product category. Shipments in the past 12 months reached 385 million cans in the fourth quarter of 2023, an annual increase of 62%. Sales growth is rare in the nicotine space, so this 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. With more than 1 billion smokers worldwide, Philip Morris has a unique combination of leading brands and market exposure. Global Market.

generous dividends

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

PM cash dividend rate chart

PM cash dividend rate chart

As cash flow rebounds, the payout ratio should fall. The bottom line is that investors are unlikely to see the dividend cut. No dividend-paying company is willing to cut its payout, but Tobacco’s management team is particularly reluctant to do so because they know dividends are the main reason shareholders hold their stocks. If needed, management can use the balance sheet to plug any gaps in dividend payments. There was $3.1 billion in cash on the balance sheet at the end of 2023, and the company had an investment-grade credit rating.

Stocks are priced to achieve solid investment returns

The best way to profit from owning such stocks is to buy, hold and reinvest dividends Dividends compound over time, and investors also enjoy some price appreciation.

Today, the stock trades at a forward price-to-earnings ratio of 14 times, and analysts believe the company’s earnings can grow 7% annually over the next three to five years. Assuming valuations remain unchanged, investors could see annual returns of more than 12%. Might be a little expensive; it has a PEG ratio of 2, and I like to buy stocks when the PEG is 1.5 or lower. The PEG ratio tells investors how much they’re paying for a company’s earnings growth – the lower, the better.

However, long-term investors should see the company’s growth matched by its price tag. What’s more, looking out five years or more, Philip Morris could become a cash cow as its investment in Zyn winds down and Philip Morris pays down some of its debt.

An eventual share buyback could lead to long-term profit and dividend growth for the company—just rinse and repeat.

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

Before buying shares of Philip Morris International, consider the following factors:

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

OMG, this stock with a 5.7% dividend yield is worth buying Originally published by The Motley Fool

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