A case for Philip Morris International

The use of tobacco products, especially cigarettes is hazardous to your health. You hear about the risk of lung cancer, but there are a host of other health ailments that can be contributed to cigarette smoke such as heart disease and gum disease. According to some statistics, an average 400,000 Americans die each year due to smoking-related illnesses.

It may seem that investing in a cigarette manufacturer seems immoral. However, from my standpoint, tobacco companies will exist and prosper and any investment or lack thereof, will not change the situation. It is inconceivable that people will withhold enough investment capital to prevent tobacco companies from conducting business. Therefore, the idea of socially responsible investing is of little significance in effecting change.

An investment in Philip Morris International (PM)
Rationale: This is the world's largest cigarette manufacturer. Following its split from Altria (MO) which handles the domestic market, PM has only international operations. The split diverted the potential litigation liabilities of MO from PM. This was a practical decision as the US has been extremely litigious towards the tobacco industry. Despite a global recession, the company offers stable cash flow as their consumer base is essentially addicted. The company has had double-digit percentage growth in Latin American and Asian markets. As the emerging markets continue to grow, there is little doubt that PM will participate in the growth. In light of the drastic expansionary monetary policy of the US Federal Reserve, coupled with the enormous fiscal budget, the strength of the US dollar does not bode well. Stock in this company is desirable in a well-balanced portfolio as PM's sales are denominated in non-US currencies, which mitigates some of the currency risk in holding other US-denominated assets. This stock also boosts a safe 6% dividend yield @ $36 per share.
Risks:
Currency risk: a strong dollar can devalue the earnings.
Litigation risk: Western Europe is beginning to shift in the direction of the US with regards to litigation against tobacco for the health damages. Other regions of the world may eventually follow suit. Potential liabilities can bankrupt the company.
Raw material costs: Inflation, increased supply shortages, increased raw material costs all diminish earnings.