Outperforming S&P 500 Performance Offered by an Impressive Dividend Expansion Stock
Market enthusiasts adore dividends for their resilience and consistency during turbulent financial periods. Given the unpredictable nature of the market over the past five years, this truth is hard to deny. Dividend payments can offer a buffer against market volatility.
However, what's a investor to do when the S&P 500 only distributes an average dividend with a yield of 1.32% - a modest annual income that pales in comparison to the returns offered by short-term Treasury bills right now?
Diversifying one's portfolio to include stocks with substantial initial dividend yields, combined with the potential for sustained earnings growth to enhance these payouts, is crucial. Yet, such stocks are a rarity in a market currently hitting record highs.
One such stock that fits the bill is Philip Morris International (symbol PM, yielding 1.68%). Often overlooked, this nicotine titan is demonstrating impressive revenue and earnings growth, while currently offering a dividend yield above 4%. Here's why this high-yield dividend growth stock could surpass the S&P 500 over the ensuing decade.
Expansion of safer nicotine options
Philip Morris is frequently characterized as a tobacco seller outside the US, with well-known brands like Marlboro and Chesterfield. This one-dimensional view of the business is outdated and misleading, having been outdated for several years.
Through strategic internal investments and acquisitions, the company has expanded its scope beyond cigarettes to encompass heat-not-burn tobacco, electronic vapor, and nicotine pouches. These alternative nicotine consumption methods, widely regarded as less harmful, have been gaining traction in the market for over a decade, with Philip Morris spearheading this transition.
Last quarter, these novel nicotine products accounted for 38% of the company's total sales, surpassing their entire consolidated business, and growing at a faster pace. Philip Morris' smoke-free division recorded a 16.8% increase in sales last quarter, driven by strong growth in Zyn nicotine pouches in the US and Iqos heat-not-burn devices in Europe and Japan. Moreover, gross margins improved due to increased scale, fueling a 20.2% increase in segment profits.
In the coming decade or so, as these products capture a bigger share of the nicotine market, they can potentially propel revenue growth for years to come.
Stable profits from traditional cigarettes
Don't underestimate the classic cigarette segment of Philip Morris International. Through persistent price hikes, the company has managed to maintain and grow its earnings from this segment for an extended period.
Over the past few years, overall cigarette prices for the company have increased by 5% or more. As a result, cigarette sales extended by 8.6% last quarter. I anticipate that Philip Morris will continue to boost cigarette sales through price increases, but even if nicotine consumers decide to quit smoking due to rising prices, the company's top nicotine pouch and heat-not-burn brands (Iqos and Zyn) can retain them as customers. This strategy enables Philip Morris to profit from shifting consumer preferences in the nicotine sector.
The dividend growth equation
Currently, Philip Morris offers a dividend with a yield of 4.4%. This payout is readily covered by its $6.46 in free cash flow per share, both figures having consistently climbed over the past 10 years. I expect these trends to persist in the decade to come.
Thanks to the rapid growth of new-age nicotine devices, revenue should increase by at least 5% to 10% annually over the next five years. Add in profit margin expansion resulting from increased scale, and I predict free cash flow per share can increase by more than 10% for an extended period. This means management will have the opportunity to increase its dividend per share by 10% annually.
Under this scenario, the long-term benefits for investors who maintain their investment are substantial. If Philip Morris' dividend per share grows at 10% annually for 10 years, the dividend yield will climb to 11% in 10 years. At the current share price of $124, such growth would likely drive the share price higher, benefiting investors who pursue income and capital appreciation through allocating their investments to this stock.
This combination is the magic of purchasing a dividend growth stock, and why Philip Morris International is poised to outperform the S&P 500 index over the next 10 years.
Investors seeking higher returns beyond the modest S&P 500 dividend could consider investing in stocks with substantial yields, such as Philip Morris International (PM), which currently yields 1.68%.
Given Philip Morris's diversified portfolio, which includes heat-not-burn tobacco, electronic vapor, and nicotine pouches, and its impressive revenue growth in these segments, investing in this stock could offer both income and capital appreciation opportunities.
