philip-morris-earningsIt would seem nearly impossible for tobacco giant Philip Morris International (NYSE: PM) to produce satisfactory operating results, given the number of stiff headwinds holding the company back. The rising U.S. dollar against international currencies is shaving several percentage points from revenue and profits. And, the general decline in smoking volumes is hurting the company as well.

And yet, shares of Philip Morris jumped 3% after reporting quarterly earnings because the results easily topped analyst expectations. It seems Philip Morris isn’t doing as poorly as many suspected, and on an adjusted basis, management expects a fairly strong year.

Here is why Philip Morris remains an attractive stock pick for value and income investors.

Earnings Easily Top Expectations

Philip Morris earned $1.89 billion, or $1.21 per share, last quarter, on $6.86 billion of revenue. Analysts expected EPS of $1.12 per share on $6.72 billion of revenue, according to estimates compiled by Zacks research.

On a year-over-year basis, the Philip Morris earnings numbers do not paint a positive picture. Revenue excluding excise taxes declined 12% year-over-year, which looks awful at first glance. But most of the damage was done by unfavorable currency fluctuations. In fact, foreign exchange effects took 33 cents per share off of Philip Morris’ earnings per share last quarter.

Therefore, from a perspective of core underlying operations, the results were actually quite strong. Adjusted earnings per share, which strips away things like currency fluctuations, actually grew 9.2% year over year.

Cigarette shipment volumes declined 1.4% to 219.8 billion units, so the reason the company grew adjusted earnings was its laser-like focus on cost efficiencies.

Plus, Philip Morris continues to hold excellent pricing power, perhaps an inevitable result of its products’ addictiveness. Tobacco is a very inelastic demand product. Philip Morris’ revenue excluding currency effects grew 4.6% last quarter.

Equally promising is that market share continues to expand. Philip Morris increased its share in several key emerging markets, including Brazil, Hong Kong, and Russia. Moreover, the company widened its share in France, Germany, and Spain.

Going forward, management expects adjusted EPS to grow at least 9% this year, and as much as 11% for the full year.

Dividend Remains Secure

In light of all the challenges mentioned above, Philip Morris has taken proactive measures to protect its dividend. Management understands how seriously tobacco investors take the dividend, which yields almost 5% in this case.

First, the company won’t buy back stock this year. This will result in significant savings, as it spent $3.8 billion on share repurchases in 2014 and $5.9 billion on buybacks the year before.

In addition, the company has strict cost controls. Last year alone, it reduced its cost structure by $300 million, with further productivity measures in place this year. These include enhancing production processes, harmonizing tobacco blends and supply chain improvements.

These initiatives helped free cash flow soar 41% last quarter, year-over-year, and an even more impressive 65% after excluding currency impacts. This will help keep the dividend intact.

And, the stock continues to offer a lot of value. Adjusted EPS is expected to reach $5.47 to $5.57 per share this year, which means the stock trades for an attractive 15 times the midpoint of this EPS range. When the valuation picture is combined with the high dividend, there are lots of reasons to like Philip Morris International right now.

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Published by Wyatt Investment Research at