Philip Morris: Safety-first income play

by Paul Tracy, editor High-Yield International

I understand that not everyone likes investing in cigarette manufacturers.

But with a history of steady cash flow generation, the strongest brand names in the cigarette industry, and substantial emerging market growth potential, Philip Morris International (PM) is an ideal safety-first income play.

While the proportion of the population that smokes is in decline, some people will continue to smoke regardless of the taxes and warnings imposed.

An even more powerful trend is that while cigarette sales volumes are declining in developed markets, there's still scope for significant growth in fast-growing emerging markets.

Philip Morris International was spun off from Virginia-based Altria  in March 2008. Altria handles the marketing and sale of cigarettes in the U.S. while Philip Morris International controls the company's massive international business that encompasses 180 countries.

Despite its roots in the U.S., Philip Morris is an established global player and has a significant 15%-plus market share in more than half of the countries in which it operates.

The company is best known for its iconic Marlboro brand of cigarettes, which still account for about one-third of annual shipments.

Europe remains the company's single most important market, accounting for about 38% of sales volumes.

That said, this pattern is shifting, as demand in emerging markets across Latin America, the Middle East and Asia is growing.

As consumers in emerging markets switch from cheaper local brands to more expensive brands such as Marlboro, Philip Morris benefits from rising profit margins.

The company also pushed through cost increases to offset rising raw materials expenses and maintain profit margins.

All told, Philip Morris boosted its 2011 earnings outlook by $0.15, to $4.70 to $4.80 per share for the full year.

The company currently pays a quarterly dividend of $0.64 or $2.56 per year, meaning that it's only paying out a little over half of its earnings in dividends.

I am looking for the firm to hike its payout to as much as $0.75 per quarter when it declares its next dividend in mid-September.

At the current payout level, Philip Morris yields 3.7%, and at a $0.75 per quarter payout, the stock would offer a yield of 4.4%.

Action to Take --> With these points in mind, I'm adding Philip Morris International (NYSE: PM) to my "Reliable Income" Portfolio as of the closing on Thursday, September 1.

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