Opportunity In Philip Morris International (PM)

This article originally appeared on The Div-Net on January 19, 2012

Philip Morris International Inc. (PM) is one of my favorite dividend stocks. It manufactures and sells an addictive product (cigarettes) with exceptional margins. It does business everywhere but the United States, which is where the domestic company Altria Group (MO) does business. This provides them with great exposure to emerging markets whose discretionary income is only set to rise over the next couple decades.

Recent weakness in PM shares may provide a long-term investor a nice opportunity. It is down 5.25% over the last trading week, and down 3.48% today. This appears to mostly be due to some analyst downgrades amid reduced EPS expectations. I think if you look out over the next 10-20 years, PM will be a strong performer. It currently yields 4.20%, and pays a quarterly dividend of $0.77 per share. The debt load is a little concerning, but the strong cash flow provides PM ample opportunity to keep debt in check while still continuing to raise the dividend.

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. 

I think the recent weakness in PM offers a long-term investor plenty of opportunity to initiate or add to an existing position. The current payout ratio is 65%, which is comfortable with the cash flow this company has. PM will likely continue to raise the dividend for years to come, after being split from MO in 2008. MO has a long history of raising its dividend, with a 43-year record of raising the dividend. The current P/E ratio for PM is 15.49 and has a debt/equity ratio of 6.0.

What about you? Buying PM on the dips?

Full Disclosure: Long PM.

Thanks for reading.

Photo Credit: PMI

Comments

  1. says

    Phillip Morris International is an excellent business.

    The only downside, in my view, is the amount of debt on the balance sheet.

    But the dividend yield, the global exposure, the stock valuation, and most importantly, the IMMENSE free cash flow, really make up for that one shortcoming, and I think it’s a solid long term holding.

    • says

      Monk,

      I agree with you on the debt. It’s larger than I’d like to see, and larger than I’m usually comfortable with but the impressive free cash flow that PM operates with comforts me pretty quickly.

      It’s now my largest holding, which I didn’t honestly plan on…but it worked out that way. I think looking out over 20 years or so, PM will be strong just as MO was over the last 50 years.

      Best wishes!

    • says

      Henry,

      The cheaper the better! I’d love to buy shares at the mid $50’s like I did with my initial batch, but I doubt that will be occurring. I agree though, under $70 would be a great opportunity. If it drops below $70, I’ll gladly add to my already large position.

      I watched the video you posted. Solid advice there! Live below your means, have a plan and try to prosper in a career you enjoy.

      The first lady retired to Florida from Grosse Pointe, Michigan. I grew up right around the corner from there, in Detroit. I now live in Florida. I guess I’m ahead of the curve!

      Take care!

  2. says

    DM,

    PM has dropped below $75. Might be a good time to nibble on some shares. I agree below $70 is a no-brainer, but PM looks attractive now for long term investors. I picked up 100 shares of MO at the beginning of January and so far I’m flat maybe down just a tad. I’m wondering if I should stay with MO for domestic exposure or rotate into PM for international exposure? PM did great last year, but MO was no slouch either. What do you think?

    DPS

  3. says

    DPS,

    I agree with you. The cheaper the better, but PM shares are trading at attractive levels for investors with long-term horizons.

    As far as MO vs. PM, I look at it like this. I’d like to own 1 share of MO for every 1 share of PM I own. Ultimately, I’ll probably end up owning about 100 shares of each. Based on their trading prices, that would be appx. 2.5-3 times as much PM as MO and I think that’s appropriate for me. MO is certainly nice for the income and yield, but I think growth will be limited. PM is just a blockbuster pick, in my opinion. I’ fairly neutral on MO overall, but very bullish on PM.

    Best wishes!

  4. Shawn says

    Hey Mantra,

    I agree PM is an amazing company as far as making more money. Can’t beat selling an addictive product. One thing to keep in mind though is some of these foreign markets are now starting to hold tobacco companies accountable for health problems and deaths. For example the Canadian government just ruled in the Supreme Court that the tobacco companies in Canada will be sued for 50 billion dollars. That’s a lot of coin

    • says

      Shawn,

      I heard about that. It was Ontario’s Superior court that ruled in favor of the lawsuit proceeding, correct? Definitely something to watch, and I understand it’s split between 7 companies. Litigation is obviously an omnipresent risk when investing in tobacco companies.

      Take care!

  5. says

    Great company, my second biggest holding. If I had any spare cash id prolly increase:) This month has been brutal to my cashbuffert so my first prio is to refill there.

    • says

      defensiven,

      It’s a solid core holding, in my opinion. It has become my biggest holding, and I’m ok with that…but I plan on scaling back on my PM purchases for the short-term so I can diversify across my portfolio and top-up other holdings.

      Best wishes!

  6. says

    Hi DM…

    As we discussed over on MMM, I’m a dedicated indexer and that’s what’s done the heavy lifting for me to FI.

    That said, I’ve also confessed that I still play at stock picking and actually had a year of outperformance in 2011 mostly riding the post bear div stock run.

    Early this year I sold those positions and took profits. With the exception of RAI.

    I may let this one run a bit.

    • says

      JC,

      Indexing is a fine way to go for many and I’m glad it’s working out so well for you.

      Dividend stocks in general did very well last year, and so far there are some under performers (PG) to start of 2012 as investors move into cyclical plays. That works fine for me.

      RAI looks like a quality stock as well. There are a number of plays in tobacco (LO, BTI come to mind) that could be profitable long-term.

      Take care!

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