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Don't Buy Philip Morris Stock. Here Are 2 Better Dividend Payers To Buy Now

Motley Fool - Mon Jun 27, 6:55AM CDT

Philip Morris International(NYSE: PM), the overseas tobacco giant spun off from Altria in 2008, is often considered a dependable dividend stock for long-term investors. But over the past five years, PMI's stock actually pulled back nearly 20% and generated a total return of less than 10% after including its reinvested dividends. The S&P 500 generated a total return of nearly 70% during the same period.

PMI underperformed the market because investors believed its business model was becoming unsustainable. For decades, the tobacco industry offset declining smoking rates with price hikes, cost-cutting measures, and buybacks to squeeze steady profits from its sluggish sales growth.

However, PMI suspended its buybacks in 2015 as unfavorable exchange rates made it wasteful to repurchase its shares in U.S. dollars. It struggled to expand as many countries with higher smoking rates passed stiffer anti-smoking regulations, and it faced tough competitive headwinds after British American Tobacco acquired Reynolds American in 2017.

PMI isn't doomed yet. It's still trying to stabilize its long-term growth by pivoting away from cigarettes and selling more iQOS heated tobacco products. It also pays a generous forward yield of 5% and trades at just 18 times forward earnings. But there have been multiple high-profile setbacks for the tobacco industry. Last week, the U.S. Food and Drug Administration ordered Juul to stop selling its e-cigarette products and President Biden's administration is moving forward with plans to restrict the selling of nicotine-based products.

That's why these two other blue-chip dividend stocks will generate more stable returns than the tobacco giant for the foreseeable future: TJX Companies(NYSE: TJX) and Procter & Gamble(NYSE: PG). Here's a look at each.

1. TJX Companies

TJX Companies owns off-price retailers TJ Maxx, Marshalls, HomeGoods, HomeSense, and Sierra Trading Post. It leverages its scale to purchase inventories from struggling retailers at liquidation prices and then sells that merchandise back to customers at 20% to 60% lower prices than full-price retailers like department stores and specialty retailers.

TJX is an evergreen investment for two simple reasons. First, it profited from the "retail apocalypse," which forced many brick-and-mortar retailers to clear out their inventories at fire-sale prices over the past decade. As a result, it continued to open new stores as other retailers retreated.

Second, TJX usually generates stable growth through recessions as cash-strapped shoppers hunt for bargains. TJX also quickly rotates its merchandise to keep shoppers coming back for fresh "treasure hunts."

Between fiscal 2017 and fiscal 2022 (which ended this January), TJX grew its annual revenue at a compound annual growth rate (CAGR) of 8%, even as it endured temporary store closures throughout the pandemic in fiscal 2021.

In fiscal 2023, analysts expect TJX's revenue and adjusted earnings per share (EPS) to grow 7% and 12%, respectively -- which are solid growth rates for a stock that trades at just 18 times forward earnings.

TJX currently pays a forward dividend yield of 2.1%, and it's raised its payout annually in 25 of the past 26 years. It spent 72% of its free cash flow (FCF) on those payments over the past 12 months.

TJX generated a total return of nearly 80% over the past five years, and it will likely remain a solid blue-chip dividend play for many years to come.

2. Procter & Gamble

Procter & Gamble is a consumer staples giant that serves 5 billion consumers across 180 countries with a portfolio of 65 well-known brands -- including Tide, Pampers, Tampax, Charmin, Bounty, Gillette, Oral-B, Head & Shoulders, Pantene, Olay, and SK-II. Like TJX, P&G also generated a market-beating total return of nearly 80% over the past five years.

P&G is considered an evergreen company because it generates stable growth throughout economic expansions and recessions. Its portfolio is also so broadly diversified that it can usually offset any cyclical declines in certain product categories with stronger sales of its other products.

Between fiscal 2016 and fiscal 2021 (which ended last June), P&G's annual revenue grew at a steady CAGR of 3%, while its EPS -- which was boosted by steady buybacks -- increased at a CAGR of 8%.

Analysts expect P&G's revenue and earnings to rise 5% and 3%, respectively, in fiscal 2022. For fiscal 2023, they expect its revenue to increase another 4% as its earnings grow 6%. Its stock isn't a screaming value yet at 22 times forward earnings, but that's still a fairly reasonable multiple for a defensive play in this volatile market.

P&G currently pays a forward dividend yield of 2.8%, and it's raised its payout annually for 65 straight years -- which makes it a Dividend King of the S&P 500. It can easily afford to maintain that streak, since it only spent 62% of its FCF on its dividend payments over the past 12 months.

P&G's growth rates definitely won't satisfy more aggressive investors, but it's arguably one of the best stocks you can own during a bear market.

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Leo Sun has no position in any of the stocks mentioned. The Motley Fool recommends British American Tobacco, Philip Morris International, and The TJX Companies and recommends the following options: long January 2024 $40 calls on British American Tobacco and short January 2024 $40 puts on British American Tobacco. The Motley Fool has a disclosure policy.

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