Philip Morris: A Solid International Tobacco Play

This article originally appeared on The Div-Net June 30, 2011

Philip Morris International (PM) appears to be a solid international play, operating in the somewhat murky waters of the tobacco industry. I say murky because although tobacco laws are not as stringent outside the U.S. and lawsuits are not as omnipresent, you always have to be careful investing in an industry where the product the company sells causes health problems to the people buying said product. That being said, this is a very profitable business, and if investing in tobacco companies doesn’t go against your moral code, I think this is a solid play.

Per Morningstar:

Philip Morris International is the world’s second-largest tobacco company, behind only China National Tobacco, and holds almost 16% of the non-U.S. market. The firm owns seven of the leading 15 international brands, including Marlboro, the company’s flagship brand that accounted for more than one third of total volume in 2010. Other key brands include L&M, Philip Morris, Bond Street, Chesterfield, Parliament, and Lark.

Owning almost half of the leading international brands in any product segment is appealing, coming from an investor standpoint. This, to me, is no different with tobacco. There appears to be significant brand loyalty with cigarettes, so this bodes well for Philip Morris. Owning almost half of the leading international brands gives Philip Morris an enviable spot, and I would say it has an economic moat due to its brand loyalty, economy of scale on a global footprint and the fact that the products it sells are addictive.

Let’s take a look at some numbers.

I can’t include numbers as far back as some of the companies I look at because Philip Morris was spun off from Altria (MO) in 2008. The numbers I’m posting are from 2008-forward.

Earnings per share has grown at a rate of 8.7%, compounded annually, over the last two years. Obviously, two years is a short time frame to try and analyze a company, but this company was part of Altria for many years so it’s hitting the ground running. This isn’t your local start-up.

Earnings Per Share ($)
1Q 2Q 3Q 4Q Year
2010 0.90 1.07 0.99 0.96 3.92
2009 0.74 0.79 0.93 0.80 3.24
2008 0.89 0.80 1.01 0.71 3.32

Revenue has grown by a rate of 2.9%, compounded annually. This is a lower number than I expected, but I think this number will be close to double digits going forward. The growth from 2009-2010 was almost 9%, and analysts expect revenue to grow by 11% this year.

Revenue (Million $)
1Q 2Q 3Q 4Q Year
2010 6,496 7,061 6,614 7,037 27,208
2009 5,597 6,134 6,587 6,717 25,035
2008 6,330 6,709 6,953 6,122 25,705

As always, dividend growth is my favorite metric to inspect. This is where Philip Morris shines, and probably will continue to shine as time goes on. This isn’t a dividend growth stock if you consider that most investors need at least five years of growth to invest, and some need ten. I feel that having a long history as part of Altria gives it the benefit of the doubt here. Dividends have grown by 25.87%, compounded annually over the last 2 years. Huge growth here, but this is largely skewed by the fact that 2008 only had 3 dividends paid due to the split that year from Altria. The 1-year growth from 2009-2010 was 8.93%, which is certainly a realistic figure going forward. The entry yield as of this writing is 3.88%, which is attractive, but not as attractive as some other tobacco stocks. I like the international growth prospects as they rank either #1 or #2 in the top 3 cigarette markets in the world (except the U.S. and China). I’ll sacrifice a little yield now, for growth later here. The payout ratio is 63%, which is very comfortable and even perhaps a little low for a tobacco company. I feel there is plenty of room for growth of the dividend.

Dividends Per Year($ Per Share)
2010 2.44
2009 2.24
2008 1.54

Overall, I’m a buyer of Philip Morris at current prices. I think it’s attractively valued with a current P/E ratio of 16.19. That’s a great valuation for a company with a strong yield, excellent growth prospects, a great product lineup and let’s not forget the product is addictive.

S&P has Philip Morris at a 5-star STRONG BUY. I generally agree with that.

The stock did recently touch a lifetime high at $71.75 and has since scaled back to the mid-$60’s. I would like to be patient with this stock and see if it scales back even further, perhaps to the high $50’s. At any rate, I like it at it’s current price and would consider adding to my position.

Disclosure: I am long PM.

Thanks for reading.

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14 Comments

  1. I own 4000 shares of PM (as well as 4000 shares of MO) — purchased in 2007. I share your positive outlook on PM.

    When other supposedly safe dividends like GE, PFE and BAC were being cut in 2008/2009, PM/MO were increasing their dividends.

    If all my holdings had performed as well as PM/MO through the 2008/2009 bear market I would be much happier.

  2. Mantra,

    I share your positive view on this stock as well. The Company has a strong outlook, high current yield (on a relative basis), moderate payout ratio and a willingness to grow the dividend as the company grows. I would love to add more at a 4% yield or better. That said, I think when they announce their next quarterly dividend it will yield 4% at today’s price.

  3. Anonymous,

    4,000 shares of each? Pretty large positions. That’s really great. I’m jealous!

    I think tobacco still has legs. I’m not sure how the new labels are going to affect tobacco sales and didn’t really include that information in my article because there’s no way to tell what’s going to happen.

    At any rate, it’s an extremely profitable business.

    Good luck with your investments!

  4. Theta,

    Adding at a 4% yield is a great spot to strike at. I don’t know if we’ll see it based on price fluctuation alone…I believe we’ll see it when they raise their dividend as you stated. I know it’s a large position for you. Let’s hope it outperforms!

    Take care and keep in touch.

  5. MoneyCone,

    Thanks for stopping by.

    The tobacco business is, by nature, a little risky…but I think the medium-term returns will be worth it.

    Take care!

  6. Kanwal Sarai,

    I understand that. I certainly believe in adhering to a moral code. If this type of investment goes against it, then I would agree with you passing on it. There are many other fantastic companies to invest in!

    Take care!

  7. I have limited funds and would like to invest in either Altria (MO) or Phillip Morris International (PM). How do you think these companies compare head to head (which one do you like better if you could pick only one)?

  8. Anonymous,

    If I had to choose only one, it would be Philip Morris International. I think the future prospects are better with international growth. I really like both, and MO has a stronger yield right now…but PM is probably the better long-term bet.

    Take care and good luck!

  9. The best defensive stock in the world. Wait until China opens up. Do not leave (BTI) British Tobacco out of your portfolio they are # 3 in the world. Homer

  10. Philip Morris is a amazing company in spite of all the lawsuit and everything else thats been done to companies selling tobacco product the company has managed to continue to increase their dividend for many years in a row.

  11. Hi Dividend Mantra,

    What long term % growth rate would you use for this company?

    Also, in your opinion, which is a proper way to calculate the long term % growth rate when you value a company?

    Thanks in advanced,

  12. Sergio,

    Well, it’s impossible to forecast out a growth rate for any significant period of time because there is so much that can happen. However, over the short-term there can be reasonable guesses. And right now S&P Capital IQ is forecasting a 12% EPS growth rate for PM over the next 3 years.

    I hope that helps!

    Best wishes.

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