Cash Flow Is Key
When it comes to evaluating the safety of a dividend, the first thing we need to verify - given the current economic slowdown - is demand for a company’s products. After all, a company needs to generate a steady stream of cash in order to keep paying its shareholders.
But this dividend stock is ideally suited to weather the economic mess and is well capable of bolstering your income.
Look no further than Philip Morris International, Inc. (NYSE: ).
Repeat Business… No Matter What The Economy Is Doing
I’m going to give you 10 reasons why Philip Morris’s dividend-paying capability is so solid.
And given that consistent business is so crucial to a company’s cash flow generation, it’s no surprise to see that the first three reasons all focus on the firm’s rock-solid demand…
1. Recessions Don’t Matter: As you might suspect, addictive products tend to enjoy the steadiest demand. In fact, based on empirical evidence from Citi Investment Research, the last two recessions “had no material effect on (cigarette) demand.” This recession should be no different.
2. Population Growth Offsets Higher Taxes: Obviously, demand is not inelastic. Consumers are sensitive to price changes. And as the world’s governments contend with sagging economies, they continue to hike cigarette taxes in order to meet budget obligations.
The World Health Organization estimates for every 10% increase in price, demand slips by 4% in mature markets and by 8% in developing markets. However, when you factor in population growth, the impact is almost cut in half. More importantly, Philip Morris’ highest margin markets (accounting for 60% of revenues) come from the less impacted mature markets. In other words, the company’s profits are extremely durable.
3. Emerging Markets: The WHO estimates that 80% of the world’s 1.3 billion smokers live in developing countries. And sales in emerging markets are increasing modestly, compared to declining volumes in developed markets.
Philip Morris is uniquely positioned to capture the lion’s share of this growth. It operates in 160 countries and derives over 60% of its sales from emerging markets.
