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Philip Morris International (MO, 1.20% decrease) is the seller of Marlboro cigarettes in the United States. It retains a powerful brand with a 42.3% market share in the premium sector. However, this is about the only positive news surrounding Philip Morris International at the moment.
The harmful news, or rather, the most detrimental news, is what investors must focus on henceforth.
The crucial trend at Philip Morris International
It isn't a secret to investors in Philip Morris International, or anyone else for that matter, that cigarettes are becoming less favored by consumers. The fact that they cause cancer, along with the emergence of various alternative products, particularly e-cigarettes, have significantly altered the perception of the product, which was once synonymous with coolness.
For instance, in the third quarter, Philip Morris International's cigarette volume decreased by 11.6% compared to the previous year. Marlboro's volume dropped by 10.5%. From January to September 2023, overall cigarette volume dipped by 10.5%, with Marlboro declining by 9.5%. While having the leading premium brand is commendable, it's hard to ignore the fact that volumes are plummeting.
This isn't a new development. Cigarette volumes decreased by 9.7% in 2022. They declined by 7.5% in 2021. The drop in 2020 was more modest at 0.4%, but this was likely due to the influence of the coronavirus pandemic. The peculiar nature of 2020 is highlighted by the fact that 2019's cigarette shipment volumes decreased by 7.3%.
From a broad perspective, it seems unwise to invest in a consumer staples company that is experiencing such a drastic and persistent decline in its primary product. To put this in another light, the volume of cigarettes sold in the fourth quarter of 2019 was 23.1 billion. By the third quarter of 2023, that number had dropped to 19.3 billion, a near 16.5% decrease.
Philip Morris International is coping as best it can
There are two sides to this tale: Volume is falling, but the price per cigarette has been consistently climbing. These price increases have enabled Philip Morris International to sustain its earnings and dividend-paying ability. In fact, despite the dwindling performance of a product that makes up nearly 90% of its revenue, Philip Morris International has increased its dividend annually for 14 consecutive years. This is clearly an attempt to entice income-driven investors.
Then there's the dividend yield, which is a substantial 9.7%. At a time when the S&P 500 index is only offering around 1.5%, this is a very appealing figure for income investors looking to maximize the returns from their portfolios. Philip Morris International's yield even outperforms that of safe income alternatives, like CDs, which currently yield around 5%. However, it's important to remember the risk associated with stock ownership, particularly pertinent when considering Philip Morris International due to the underlying business trends.
To be fair, the dividend is likely sufficient for now. The company's most recent quarterly dividend payment was $0.98 per share (an increase of two cents from the previous rate), and adjusted earnings totaled $1.28 per share in the third quarter. This results in a payout ratio of 76.5%. However, income investors must consider how long Philip Morris International can continue to walk this financial tightrope as it seeks to offset volume declines with price increases.
Proceed with caution and keep a close eye
Philip Morris International's stock has decreased by around 50% from its 2017 highs. This has pushed the yield up to its current levels, but it also signifies that investors have a negative outlook on the company's future. A key driving force of this negativity is the ongoing volume decline in the company's primary business.
Yes, you can collect a substantial dividend that has been growing, but you may own a company that has transitioned from milking a cash cow to draining it dry. Most should avoid this business, but if you are tempted to invest, make sure to closely monitor the volume trends. At some point, price increases may no longer be sufficient to counteract the business's downward spiral.
Despite the persistent decline in cigarette volumes at Philip Morris International, the company has managed to sustain its earnings and dividend-paying ability through price increases. This strategy has attracted income-driven investors, with Philip Morris International's dividend yield currently at a substantial 9.7%. However, investors should exercise caution and closely monitor the volume trends, as price increases may not be sufficient to counteract the business's downward spiral in the long term. To further manage financial risks, diversifying investments in other areas of finance and investing, beyond consumer staples companies, is advisable.