NEW YORK (TheStreet) -- There is one cigarette stock with a whopping 4.7% dividend yield and surprisingly solid growth for a business in a slowly declining industry. Since 2008, this company has grown revenue-per-share by 9% a year and dividends-per-share by about 12% a year. Over the next five years, it is expected to grow earnings-per-share at 7.5% a year. The company's current dividend yield of 4.7% plus its expected earnings-per-share growth of 7.5% a year could give shareholders a total return of 12.2% a year for the next several years.
What cigarette company is generating strong double-digit returns for shareholders? This company is the only stock in the Top 10 for those who follow The Eight Rules of Dividend Investing that also passes the Chowder Rule test.
It is none other than Philip Morris International (PM - Get Report) . Philip Morris International was created in 2008 when Altria (MO - Get Report) spun-off its international tobacco division. Philip Morris International sells Marlboro, Parliament, and Virginia Slims (among other brands) internationally. The company has no sales in the U.S.. Despite this, Philip Morris International is the largest tobacco company in the world with a market cap of $131 billion.
Philip Morris International has managed to grow earnings-per-share and dividends-per-share despite overall volume declines in the cigarette industry. The company has accomplished this through share repurchases and through the strength of its premium Marlboro brand. Since 2008, Philip Morris International has reduced its net share count by 4.2% a year.
The Marlboro brand has given Philip Morris International large market share around the globe. The company grew market share in the European Union (now up to 39.7%), North Africa, and Russia in its most recent quarter. The company has grown revenue at 4.4% a year since 2008 thanks to market share gains and price increases, which have more than offset volume declines.
Philip Morris International has proven over the past seven years that it can raise prices as fast as governments increase cigarette taxes. Tobacco products are highly addictive and, as a result, the demand curve for tobacco products is inelastic; consumers will not cut back much despite price increases.
Going forward, Philip Morris International should be able to continue growing earnings-per-share somewhere between 6% and 9% a year. The company will realize this growth through market share gains in the premium cigarette category, strong share repurchases, and price increases that offset the negative effects of cigarette tax increases.
Heated Tobacco and The Future
Philip Morris International is investing in heated tobacco products, e-cigarettes that heat tobacco without burning it. These "safer cigarette" products deliver the same nicotine buzz and taste as a traditional cigarette, but with less harmful side effects (not healthy; just less harmful). E-cigarettes and heated cigarettes are expected to deliver significant growth for Philip Morris International in the coming decade.
Philip Morris International is currently trading at a price-to-earnings ratio of 17 which is well below the S&P 500's current price-to-earnings ratio of 19.1. Historically, the company has traded at a price-to-earnings ratio of about 0.9x the S&P 500's price-to-earnings ratio.
Investors will eventually catch on to Philip Morris International's market-beating expected total return and drive the company's price-to-earnings ratio above that of the S&P 500's to reflect its better return potential. I believe a fair price-to-earnings ratio premium for Philip Morris International is about 1.05 to 1.1 times the S&P 500's price-to-earnings ratio. The company appears somewhat undervalued at this time.
Philip Morris International is also trading below its peer group's price-to-earnings ratios:
- Altria (MO - Get Report) price-to-earnings ratio of 24.9
- British American Tobacco (BTI price-to-earnings ratio of 19.2
- Reynolds American Tobacco (RAI price-to-earnings ratio of 23.2
- Lorillard (LO price-to-earnings ratio of 20.9
- Vector Group (VGR - Get Report) price-to-earnings ratio of 25.3
The average peer price-to-earnings ratio is 22.7, versus just 17 for Philip Morris International. Compared to the S&P 500 and its peers, Philip Morris International appears undervalued.
Philip Morris International is an industry leading corporation that sells a highly addictive product with extremely strong and well-recognized brands. The company is very shareholder friendly with its 4.7% dividend yield and 4% or more per year share repurchases.
Despite being in a declining market, Philip Morris International is projected to grow dividends and earnings at a reasonable pace. The company is a favorite of The 8 Rules of Dividend Investing thanks to its high dividend yield, strong expected total return, and reasonable valuation. The company should appeal to shareholders who are looking for both high current income and increasing dividends going forward.