Yahoo Finance Markets are gloomy – but investors can rely on the 1.1bn people who won't change their ways
The world economy’s outlook is becoming increasingly bleak. Risks including rampant inflation, rising interest rates and war in Ukraine are leading to widespread downgrades in growth assumptions. The IMF, for instance, now expects global growth to almost halve to 3.2pc this year, with a further 0.3 percentage point deceleration anticipated for 2023.
While such forecasts could prove to be overly pessimistic, sky-high inflation that prompts further monetary policy tightening is unlikely to be conducive to economic growth. In Questor’s view, defensive stocks that are less impacted by a slowing global economy could therefore become increasingly valuable over the coming months.
Philip Morris, a US-listed tobacco firm that focuses on international markets, is relatively unreliant on the world economy’s performance. Smokers are likely to reduce demand for a wide range of goods and services before they cut back on cigarette consumption during an economic slowdown.
The relatively inelastic nature of demand for tobacco products further means that the industry is largely immune to the ill-effects of high inflation that are set to squeeze profitability across a variety of sectors.
Indeed, price rises contributed to the business delivering expectation-beating top and bottom-line growth in its recent second-quarter results. This led to an upgrade in its full-year outlook, with revenue and profit forecast to grow by 6-8pc and 10-12pc, respectively, at constant currency.
Rapid interest rate rises prompted by extreme levels of inflation are unlikely to pose a major problem for the firm. Its net interest payments were covered 21 times by operating profit in the most recent financial year. With a solid financial outlook, it offers a relatively low level of risk as almost 14 years of loose monetary policy swiftly comes to an end.
Beyond its short-term capacity to overcome a slowing global economy and rising inflation, the business offers encouraging long-term growth potential.
It has invested heavily in a range of reduced-risk products, such as heated tobacco and vaping products, that are becoming more popular with increasingly health-conscious consumers. They now account for 30pc of its sales and are expected to contribute the majority of revenue by 2025.
Meanwhile, cigarette consumption offers a far more upbeat outlook than many investors may realise. Although England is aiming to achieve a smoking rate of 5pc or below among adults by 2030, the global picture is very different.
Currently, 1.1bn people smoke cigarettes. That figure is not expected to materially change by 2025.
With Philip Morris operating in 180 markets and having a 27pc global market share (excluding the US and China) that includes major brands such as Marlboro, it is well placed to capitalise on continued high demand for its range of products.
It also has sufficient time to transition towards less harmful products over the coming years without experiencing a ‘cliff edge’ of falling demand for cigarettes.
Of course, governments across the world continue to introduce legislation that is aimed at reducing the prevalence of smoking. In addition, reduced-risk products, and cigarettes, could be viewed as an increasingly easy target for taxation as governments ultimately seek to tackle excessive debt piles amassed since the global financial crisis.
However, such risks are omnipresent for tobacco companies and are outweighed by their long-term growth prospects and income potential.
Indeed, Philip Morris currently yields 5pc from a dividend that has grown in every year since it became a listed company in 2008. Since then, shareholder payouts have risen at an annualised rate of 8pc and are currently covered 1.2 times by net profit.
Alongside this, it has defensive credentials that are likely to become a useful ally for investors as the world economy experiences the pain of high inflation, rising interest rates and geopolitical challenges.
In Questor’s view, the firm offers a compelling investment opportunity at the present time. Buy.
Questor says: buy
Ticker: NYSE:PM
Share price at 5:30pm: $97.89
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 5am.
Read Questor’s rules of investment before you follow our tips.
