My Best Stock Idea For 2015

upgraphI like to look at every single day as an opportunity. An opportunity to grow, learn, change, and become better. So you can only imagine what I think of the New Year and the 365 opportunities that lie therein. It’s just an incredible chance to change your future.

It’s also a chance to grow your wealth and income, which is something that most of us are highly interested in.

And it appears to me that there’s one stock right now that perhaps offers a better chance at that than most. I don’t ordinarily proclaim an idea as “best” or a stock that’s likely to outperform any others or the broader market over really any period of time, especially just one year. It’s simply not a game I wish to play – Mr. Market is far too fickle – and it’s certainly not necessary for long-term success as an investor. However, after a lot of interest over the last few weeks about my best idea for the year, I figured I’d just go ahead and write a post on my favorite stock right now, which I think should do well not only in 2015, but also for many years to come.

My best idea right now is Philip Morris International Inc. (PM).

Overview

Philip Morris International Inc. is the world’s largest publicly traded tobacco company, manufacturing and marketing a variety of tobacco products. Their products are sold in more than 180 countries, excluding the US.

They own seven of the world’s top 15 cigarette brands including Marlboro, the world’s #1 selling brand.

Their fiscal year 2013 revenue geographically broke down as follows: European Union, 35%; Eastern Europe, Middle East & Africa, 26%; Asia, 26%; and Latin America and Canada, 13%.

Fundamentals

Philip Morris was spun off from Altria Group Inc. (MO) in 2008, so the usual 10-year financial results I look at aren’t available here. Needless to say, however, that Philip Morris International has been in operation for a very long time and is a very established company.

I’m going to show what the company has been able to generate over the last five years, which should give us some idea as to what the may be able to produce over the foreseeable future.

Revenue increased from $25.035 billion in FY 2009 to $31.217 billion in FY 2013. That’s a compound annual growth rate of 5.67% over that time frame.

Earnings per share grew from $3.24 to $5.26 during this period, which is a CAGR of 12.88%. Both top-line and bottom-line growth have been hampered over the last couple fiscal years due to currency effects, as I’ll discuss a bit more below.

Growth has slowed down over the last two years as compared to the prior three over the preceding time frame, but this appears more due to currency effects more than underlying issues with the company.

S&P Capital IQ is predicting 9% compound annual growth in EPS over the next three years, citing continued share repurchases and possible volume growth and pricing expansion in emerging and developing markets.

As far as a dividend growth is concerned, PM offers a lot to like. They’ve increased their dividend every year they possibly could since being an independently traded company, with seven consecutive years of dividend raises under their belt.

The five-year dividend growth rate stands at 12%, though I’d expect dividend growth closer to 6% to 7% moving forward.

What’s perhaps most attractive about this stock right now is its yield, at 4.79%. That compares extremely favorably to PM’s five-year average yield of 4.1%. It also compares very well to the broader market and most other stocks as well. It’s not often you find a stock that offers a yield of near 5% with a historical dividend growth rate in the low double digits. The total return prospects are obviously attractive.

The payout ratio of 80% is moderately high right now, though most tobacco companies routinely sport high payout ratios. Free cash flow comfortably covers the dividend right now.

Of particular note, the company has noted that it plans on returning around 100% of its free cash flow to shareholders in the future. And it just so happens that Philip Morris generates gobs of FCF because its operating cash flow is quite high and capital expenditures as a percentage of that cash flow is quite low. So you basically have a company that’s mature and operating at a high level interested in returning all of its FCF to shareholders. That, in my view, is called a “cash cow”.

The return will occur through increasing dividends and share repurchases, both of which PM is generous with. Just over the last five years, the company has repurchased some 300 million shares, reducing the share count down to approximately 1.6 billion.

PM’s balance sheet might confuse some, since the company sports a negative book value due to an unusually large amount of treasury stock. The company, like many others I can think over the last few years, has taken on low-interest long-term debt to help fuel buybacks. While PM now has over $25 billion in long-term debt on the balance sheet, its interest coverage ratio, at ~12, is more than satisfactory.

Meanwhile, the company’s profitability is off the charts. Net margin has averaged 27.03% over the last five years, which is outstanding. It’s also been steadily improving over the last five years.

Qualitative Aspects

The company boasts an estimated 28.3% share of the total international cigarette market, outside of the US and China. And as I mentioned earlier, they own the #1 brand in Marlboro. What’s particularly appealing is that its market share in a number of key markets has been growing as of late.

In my opinion, PM’s competitive advantages are strong and their economic moat is wide. Their primary product is addictive in nature, which creates enduring relationships with their customers. This addictive nature has also afforded the firm an ability to raise prices even in the face of increasing global excise taxes, which has effectively counteracted declines in global volumes.

In addition, the company has economies of scale and a distribution network that would be difficult or impossible for a new competitor to replicate. Limited competition in the industry keeps pricing favorable and advertising bans means it’s unlikely new competition will rise up.

Though volume declines have long been a concern in the industry, they are slowing. And the company is predicting just a 1% to 2% annual decrease in volumes from 2015 to 2017, which would be a solid improvement over what we’ve seen over the last three years.

Electronic cigarettes, also known as e-cigs, present a unique and exciting opportunity for PM and other major tobacco companies. This is the growth product that I believe these companies (and their investors) have been looking for for years now. PM has taken this opportunity seriously by investing in its own products, called reduced-risk products (RRPs). These include a number of platforms which offer products ranging from heated tobacco products to electronic cigarettes. They’re also using their capital and position to purchase established players in the e-cig industry, such as Nicocigs, Ltd., which sported a 27% share of the UK e-cig market at the time of PM’s purchase of the company in the summer of 2014.

Many of the RRPs are still in the stages of development and commercialization, but this presents a rather large runway of growth, in my view.

It should also be noted that PM is the only major foreign cigarette company to have an official foothold in China through the licensing of their Marlboro brand in that country. Though this is a small part of the company, any loosening of regulation in China could have a huge impact on Philip Morris and its ability to grow.

I mentioned currency effects earlier, which is having a material impact on the company’s results. Unfavorable currency negatively affected FY 2013 EPS by a full $0.34. For FY 2014, that number is expected to be $0.72. However, I think currency effects tend to even out over the very long term, so this headwind could very well turn into a tailwind down the road. Currency-neutral results have been very attractive and the company will continue to do business in spite of these setbacks.

Overall, I think Philip Morris is an excellent position to continue profiting from international tobacco usage.

Risks

Of course, the company does have risks. I view the company’s primary risks as regulation, litigation, and taxes. However, this is nothing new and the company has been dealing with these headwinds for decades. Plain packaging is perhaps one of the biggest risks, if it were to spread into major markets beyond Australia. In addition, there is the aforementioned currency risk.

Valuation

PM’s stock can be purchased for a P/E ratio of 16.78 right now, which is more or less in line with their average over the last five years. But this is in the face of a stock market that is near all-time highs. In addition, their opportunities right now are, in my opinion, even greater than they were five years now.

I valued shares using a dividend discount model analysis with a 10% discount rate and a 6% long-term growth rate. That rate is conservative and factors in some of the short-term issues with currency and RRP investment, as well as the moderately high payout ratio. It’s also in line with the most recent dividend increase. I think that it’s fair to assume that PM can grow the dividend at this rate over the long term, especially factoring in their historical growth and the company’s guidance moving forward. Any favorable currency rates will possibly boost this rate. The DDM analysis gives me a fair value of $106.00.

Conclusion

I believe PM is an undervalued, high-quality stock. The yield is very attractive and I believe PM’s desire to return all of its FCF will result in generous dividend growth and total returns moving forward. Their competitive position is enviable and they sell an addictive product, leading to an economic moat that is about as wide as it gets. New growth products via RRPs are now coming online, which could offer a huge opportunity. Even without these products, PM has been doing very well, so the additions could generate returns beyond what the company is forecasting.

It’s not really an interest of mine to list stocks that I think will outperform the market or any other stock over a certain time frame. It has nothing to do with my goals or ability to become financially independent at 40 years old. Furthermore, the stock market is a highly unpredictable beast and even great stocks can remain undervalued for lengthy periods of time or become unwanted when they should be desired. However, I’ve had a number of readers email me about my favorite stock for the year, and this is it. If someone were to twist my arm and demand me to name a stock I believe will outperform the market this year, it would be Philip Morris International. In fact, this is the stock I listed when I was asked to be a part of a friendly little competition.

If I didn’t already have 115 shares, I’d be buying as much PM as I could afford right now. Fortunately, I was able to load up at cheaper prices and now have a position that’s probably about as large as I’ll ever want/need.

One last note: We all know PM sells cigarettes. We all know this is a controversial business. If this is all you have to add to the conversation, you’re not really adding anything of value. Cigarettes are a perfectly legal product where adults of legal age can freely purchase and use these products. You don’t have to purchase PM’s products and you don’t have to buy their stock. It’s a wonderful world where most of us have freedom and choices available to us.

In the interest of looking at different perspectives, I’m going to share some other valuation opinions about PM’s stock:

Morningstar rates PM as a 4/5 star value, with a fair value estimate of $90.00.

S&P Capital IQ rates PM as a 3/5 star hold, with a fair value calculation of $82.30.

Full Disclosure: Long PM and MO.

What do you think of PM here? A solid value? Do you like their opportunities? 

Thanks for reading.

Photo Credit: Ppiboon/FreeDigitalPhotos.net

Edit: Corrected CAGR for revenue and EPS.

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181 Comments

  1. Excellent idea for the year, Jason. I’ve only got a small batch of PM and have been telling myself to add some more, thanks for the reminder. I liked IBM a lot for the year and it’ll be a fun story to watch play out. I’m just glad we’re seeing more more investment opportunities opening up lately, but now I don’t have as much capital to invest while saving for the wedding and honeymoon. But that’s a whole other worthwhile long term investment in life. Hope all is well with you!

    Best Wishes,
    Ryan

  2. I think this is a great stock. I do not own any because I already have positions with Altria and Lorillard. Perhaps I’ll sell my Lorillard and open a position with PM. Even with regulation, taxes and lawsuits, I do not see a near future without cigarettes. In fact, smoking has been declining for over a decade in the US, but seeing double digit increases in emerging markets. So, even if the US becomes an unfavorable market, China and India with billions of consumers will be enough to earn massive revenues.

    Jason, do you think there is room in a portfolio for all three companies, Altria, Lorillard and Phillip Morris?

  3. Henry,

    I’ve looked at RAVN before. Love the dividend growth record and the fundamentals look pretty solid. However, the business seems a bit disjointed to me. Just can’t wrap my head around it right now. That may change.

    I had to look into CLB’s numbers a bit deeper over the weekend while writing an article on recent dividend increases. Really impressive stuff. The ROIC is massive. Seems like a great buy right now. I’m interested in perhaps initiating a position, but my exposure to energy is already very high as it stands.

    Thanks for stopping by and sharing your ideas! 🙂

    Best regards.

  4. DD,

    Your LO stock will be sold for you pretty soon here, assuming the deal with RAI goes through. I’d personally just wait for that, since you’d be giving up gains by selling now. That is, of course, unless you don’t think the deal will go through or if you don’t want any RAI stock. It’s unfortunate RAI won’t be taking over blu.

    But I think there’s room in a portfolio for all three, as I own positions in all three companies. I personally like PM the best due to their international exposure, but the other two have also done very well for me. That said, I wouldn’t want a large portion of my net worth invested in tobacco. That’s only because some type of major regulatory change could have material impacts on the business model.

    “So, even if the US becomes an unfavorable market, China and India with billions of consumers will be enough to earn massive revenues.”

    Keep in mind that they don’t do any business in the US and their China operations are very small. However, I think there’s a chance that they’ll eventually scale up operations in China. That would be incredibly exciting as I believe China accounts for about 40% of the world’s total cigarette consumption. Really incredible stuff.

    Cheers!

  5. Perhaps my living in San francisco where everyone is a health nut has skewed my perception, but I find it odd you didn’t list health concerns in the risk category? Regulation litigation and taxes are a concern for just about any company. Also, I own pm so this has nothing to do with whether you should morally buy it. However, as a share holder, my biggest fear with tobacco is none of the risks you mentioned, and instead my biggest fear is the natural shift towards healthier stuff the world seems to be making. Again, I could be skewed as I know I live in one of the most health conscious parts of the world. I just can’t picture a world 20 years from now with as many smokers as there are today. Not because of regulation or litigation, but because smoking just seems to be losing its intrigue with most folks these days.

  6. FV,

    You’ve got it. Tough to go wrong with investing in an addictive product that people are generally willing to continue using and paying up for. I’ve never smoked a cigarette in my life, but I appreciate and respect others’ rights to do so. Vices are usually expensive, which bodes well for shareholders. 🙂

    Best regards.

  7. Ryan,

    I hear you there about capital. I have a wedding, honeymoon, and a looming tax bill all fighting for my capital’s attention. But life is good. We’ve got our respective snowballs already rolling and money is now working for us, even when we’re not. 🙂

    Thanks for dropping by. Keep up the great work over there!

    Best wishes.

  8. In Finland smoking has more and more become habit of old men and poor people. 20 years ago all social classes smoked, but not so anymore. You don’t smoke anymore if you don’t like to seem like a loser. I’m not confident that Jason really knows what is happening in Europe. And China, they are not gonna be loosening anything. For me it is hard to see PM as a best idea for 2015. Only positive thing is this ecig thing.

  9. Nice pick for 2015 Jason. We don’t own any stocks in this sector but have PM on our watch list. We definitely would like to initiate shares in the company but would prefer an opportunity somewhere in the high 70s. Thanks for your insight and analysis of PM. AFFJ

  10. PM is on my short list. IBM is staring me in the face, but I’m hesitant to buy more with their revenue never rising. Stock buybacks can only raise EPS for so long.

    But JNJ at ~16.5x earnings is my top pick at the moment. Great company at a fair price. Apparently the markets didn’t like their quarterly report, but I thought it was fantastic. The weak Euro was a drag on their numbers, but I’ll take the sudden 3% sale.

  11. Jason,
    Very timely post, my eyes are glued on PM right now and your post convinced me about the better value out there (besides energy). I asked you few weeks ago about your opinion on PM at this level and you said the same thing about having 115 shares which I agree. In my case I am planning on selling some TGT shares and convert it to PM but we’ll see.. Thanks for sharing your thoughts.
    FFF

  12. AFFJ,

    I definitely hope PM gets there for you. A nice market-wide sell-off would probably get it down into the $70s pretty easily. I think there’s more potential upside than downside over the long haul, but the short term could present anything. 🙂

    Thanks for dropping by!

    Best regards.

  13. Justin,

    IBM is a great value. It’s really a better pure value than PM. I just think PM has more short-term opportunity to move up. So if I were looking at which stock will perform better from Jan 1, 2015 to December 31, 2015, PM is my bet. But I own both. I think IBM will be fine over the long haul. It’ll just take some more time to continue turning things around.

    JNJ is a great pick. It’s my largest single holding. In fact, I was emailed a couple of weeks ago by a prominent personal finance blogger to name my favorite stocks and they were JNJ and PM. Shouldn’t be too hard to guess since they’re my largest investments. 🙂

    I think PM has more short-term opportunity with a higher yield, similar valuation, and higher growth expectations. But looking out over the next 10 or so years, I think both will be great investments. I’m certainly very happy to be invested in a large way there.

    Thanks for sharing!

    Best wishes.

  14. took2summit,

    Well, the health risk is indirectly related to litigation and regulation. It’s exactly because tobacco usage is correlated with disease that this company is so heavily regulated and taxed. Litigation and regulation is a risk for most companies, but not in the same frequency or intensity as you see with tobacco companies. Can’t remember the last time I ran into plain packaging for any other product.

    As far as volumes go, they’re going down in developing countries. But what you see in San Francisco isn’t the same all around the world, and certainly not in areas like China or the Philippines. Be careful not to extrapolate your personal biases and experiences unto everything else. And, as mentioned in the article, electronic cigarettes are a growth category. All in all, I think the prospects are quite bright for the next decade.

    Take care!

  15. D-Crat,

    Well, we could rely on anecdotes and opinions…or facts and numbers. I prefer facts and numbers when it comes to investing. The EU market share is actually on the increase and volume decreases there are leveling off in a big way. So your version of what’s going on and what the numbers show don’t jive. And that’s before even discussing the massive potential of e-cigs.

    Furthermore, you have to remember that Finland is a fairly insignificant market with around 5 million people. I think PM could lose all of its business in Finland and it wouldn’t matter. I prefer to look at massive growth opportunities in a country like the Philippines with 100 million people where smoking is on the rise. They consume about 100 billion units/yr over there. I keep my eye on the big picture.

    Cheers!

  16. Ethics ethics ethics 🙂 My standards are measured by “would i be happy if my childred did this”? Smoking….a big no! If you dont want your children to smoke you shouldnt invest in philip morris.

  17. DM

    I am also from Europe. In addition to a changing attitude towards smoking (incl. bans in public places etc.) I suspect that the strong USD will really hurt PM in the quarters to come. A pure US play would be the better option in my view.

    Best ideas for this year: JNJ, Roche, Nestlé. Buy any significant dip. The impact of the Swiss Franc is overrated as companies like Roche and Nestlé produce a lot outside Switzerland & sell the majority in the US and Emerging Markets.

    Lastly, Mr. Draghi will introduce QE tomorrow. That will weaken the EUR further vs. USD. So you might want to take a look at some European shares that could represent bargains in USD terms.

  18. Do you want your children to support or eat GMO food? Do you want them to use or buy weapons? Do you want them to polute the air with CO2? Do you want them to eat junk food? Do you want them to consume big amaounts of sugar in drinks or food? Do you want them to polute water with chemicals? etc. The potential list of companies might get very small.

  19. Very nice pick for 2015.

    I picked up 27 shares of PM and 80 shares of GDJX on friday.

    PM is primarily a dividend stock for me while GDJX is more of a value play.

  20. Great stock, one of my bigger positions. I’m not gonna buy now because I already have a nice position in both PM and MO. I am looking to add some more IBM, NOV and KO next month.

  21. It’s a good company by fundamentals but my ethics don’t allow me to invest there.

    Some things are either good or bad depending on the use you do of it. But I can’t find any good use you can give to tobacco as oposed to nuclear energy or oil for example.

    I like to invest in companies that “the world is a better place with them than without them”, how does PM makes the world a better place to live in?

  22. I agree. the strong dollar is a serious issue. Moreover, the attitude towards smoking is changing, I don’t know where those figures came from that said the European market was growing, because it just doesn’t seem to reflect the reality I see every day in the UK.

    I suspect it’s Central and Eastern Europe, especially the latter, that’s bumping up the numbers, since in Northern and Western Europe, it really is as D-crat says, smoking is seen as something old men and poor people do – it’s not cool, and it’s banned in pubs, taxis, and restaurants, and anywhere to do with children. It’s only a matter of time before it tails off completely in these countries. I have noticed that smoking is really popular in Switzerland, Austria, Hungary, and the Easter European countries.

    Anyway, enough of observations, what do the figures say? Smoking around the world, percentage-wise, is on the decrease, but the numbers of individuals smoking has gone up, globally, due to population growth. Places such as China and Indonesia are on the rise, but elsewhere it’s on the decline. Check out this report in the Journal of the American Medical Association: “Smoking Prevalence and Cigarette Consumption in 187 Countries, 1980-2012″, it was a special issue devoted to tobacco.

  23. Hello Jason,
    First time writting you from Spain. PM could be my first USA share. I´ve been studied last month and was recomended in the dividend blog comnunity here. I need to diversify my portapolio with USA & UK companies this year

    Regards

    Sergio CG

  24. Francois, you have to start somewhere. Its not an excuse to identify other areas where you do nothing. Do something good is better than nothing at all!

  25. Hi Jason. Tobacco companies have the perfect mix of reoccurring customers and growing dividends. I was wondering if you’re looking to add to your IBM position after the decline overnight.

    I think 2015 is going to give us plenty of volatility. Happy hunting buddy
    -Bryan

  26. Hello Jason,

    I am new to investing in stocks and dividend income but recently I have read some blogs and books about investing in general.

    I would also like to start inesting into the dividend stocks but since I am from Estonia (Europe) and so far I have invested into private loans (annual interest rate around 15%) and also I got one property (ROI around 25%).

    If I look at the stocks for example PM the return of my money is only around 5% minus the expences I have by investing outside of the USA (stock purchase fees, account fees etc.)

    As I told allready I am a noob, what it comes to stocks but can you explain me, why should I invest into stocks, if I can find 10+% income investments? I know, that dividends are passive but so are real estate and private loans, if you know, how to manage them.

    Best regards,

  27. DM,

    Well PM has certainly been stuck in the mud the past couple of years, especially when compared to MO. I originally bought shares of both about a year and a half ago. MO was around $33 and is now in the $54 range. With PM I paid $85 and the stock hasn’t moved at all. I have averaged down in PM most of last year and will probably continue to do so again this year.

    I also just noticed the PE for MO is around 25 and is around 16 for PM. MO may actually be something to lighten up in. I will have to research things further.

    MDP

  28. Hey look at that! Great minds think alike as I just picked some up last month. You’re right with the currency concerns, very cyclical and oftentimes what comes around, goes around. As for the declines, sure, it is a risk, as with any cultural shift. But given the overall potential with PM is universally abroad by the nature of the company, I am much less concerned with this. As you mentioned, a tiny fraction of a change in China would generate a flood of cash. And given things over there, they are going the route of loosening as opposed to tightening.

    While I will likely hold off on purchasing more in the immediate time frame, it won’t be leaving my watchlist any time soon.

  29. PM was by best stock idea for 2014.. It hasn’t done as well, (by which I mean EPS has been flat and is probably not going to increase in the next 12 – 24 months). EPS went nowhere for 2 years, in large part due to foreign currency issues. At some point currencies are a wash ( like Euro versus Dollar or CDN/USD), although emerging market currencies typically tend to depreciate against the US dollar over time. I am thinking about Roubles, Turkish Liras, etc.

    Just like you do, I have too much in PM so I cannot really add much. It’s funny how in 2008 everyone was more bullish on PM than on MO, because the international environment was supposed to be better for tobacco companies than the US one. Yet, MO has done fantastically well, while PM has done ok.

    So the lesson for me is, I should not tell about one “best stock”. I should tell them to own a diversified portfolio consisting of at least 30 individual securities, representative of as many sectors as possible. That usually does the trick 😉

  30. I like this stock a lot, great dividend and as an extra bonus the dividend is largely exempt from U.S. withholding tax for non-U.S. shareholders thanks to its 80/20 company qualification 🙂

    Currency issues could be a worry as the dollar is gaining more and more strength but in my case this is counterbalanced as a higher dollar means I’m getting more euros when PM pays out its dividend.

    I don’t think I’m going to add more PM to my portfolio anytime soon though, with a current weight of 24% I feel like I have more than enough PM.

  31. You are comparing leveraged (real estate and credit) returns vs unlevered (equity) returns from US public markets.

    Not really comparable and with very different profiles for growth and income. Outside of prime real estate markets, most property rents do not appreciate more than 2-3% per year, and the same goes with the property value (although the last few years have seen big jumps up and down). Stocks, as a whole, tend to increase in price over long periods of time by 5%+ and some (strong dividend stocks) also increase their income (dividends) by 5%+ each year.

    It’s not really worth comparing, since both are good investments in absolute terms, but best to choose some allocation so you have a good mix of investment exposure.

    For what it’s worth, I do plan/hope to sell off portions of my equity investments over the next 10-20 years in order to fund real estate purchases, but who knows what the future holds!?

  32. Hey Jason,

    I am a longtime reader and just wanted to get your views on someone beginning there dividend portfolio.

    I have out a small amount of capital in my stock account and I am looking at a handful of stocks that I might want to purchase and just wondering what you thought of these.

    My top pick is 1.T 2. VZ 3. CVX 4. KO

    What would be a good dividend stock to start with..

    Thanks
    Chad

  33. I like PM, have a little bit of it, just not in love with the long-term value in smoking. Added some JNJ on the big drop yesterday and still looking to enter all energy conglomerates as their prices hover at 52-week lows.

    Going to be a year to ride the dips!

  34. I’m with you, JKR. Others will always try to point out that other companies have products that can inflict harm upon people. However, most of those products they point out have some redeeming qualities and usefulness.

    Cigarette companies are out to poison their customers and profit from their addiction to that poison. Where is the positive impact that these companies are providing? They are not trying to make the world a better place, unless you count a really sick brand of population control.

  35. FFF,

    Glad the post provided some value. I’m not buying any more myself, but I’d be all over this stock if I wasn’t already loaded up as much as I can be. 🙂

    Cheers!

  36. jkr,

    Right. And freedom of choice extends both to your choice not to invest as well as consumers’ right to purchase cigarettes. I’d hate to live in a world where one person’s opinion held sway over everyone else. We’ve seen when countries are run like that…and it never ends well.

    You must not have read the bottom of the article where I noted comments like this add no value. Thanks for adding no value. 🙂

    Take care.

  37. Francois,

    PM is forecasting for a smaller hit to EPS from currency, but it’s obviously impossible to forecast that extremely accurately. I believe they’re using prevailing rates. As the recent Swiss decision shows, nobody can really tell what’s going to happen with currencies from day to day. Furthermore, most US multinationals have exposure to currency effects. You mention JNJ as a great idea, yet forget that they also do business all over the world. These types of things are hard to avoid and not really a concern for a long-term investor anyway.

    Not sure about NSRGY right now. The value doesn’t seem to be there, in my view. And that’s especially true after the ADR shares popped pretty substantially after the currency announcement. Fantastic company, but not so sure about the stock at this current valuation.

    Thanks for dropping by!

    Cheers.

  38. Sindre,

    Nice move there. Glad to have you as a fellow shareholder. I’m confident that it’s a solid value here, but I’m even more confident of its long-term prospects looking out over the next decade or so. There’s surprisingly a lot of opportunity there. Meanwhile, it’s a cash cow. Should work out well for us. 🙂

    Best regards.

  39. DD,

    You and I are on the same page. It’s one of my largest investments, so it’s just not prudent for me to really add more. Through natural growth, PM should remain one of my largest investments for some time, even without adding new capital.

    Thanks for dropping in!

    Best wishes.

  40. Hi Jason,

    Agree with your analysis except for your Chinese expectation. The Chinese market will probably never be a big field for PM considering the following points:

    – Consumer habits and taste, Chinese people are very incline of the appearance and unfortunately the Marlboro doesn’t have this image, if you compare the price of it vs. Chinese Brand it doens’t bling. Imagine the pack of Marlboro is probably around 2-5USD vs some of bling bling brand at 100USD THE PACK!

    – Chinese are used to smoke Virginia tobacco and not the American blend, same comment is valid for Indian consumer.

    Regarding the RRP product, the IQOS that have been launch in two cities in Japan and Italy, I have a lot of confidence that it will be the next big HIT. I have tried it and some friend are smoking it and they feel the difference after 3 weeks already, less smoke smell, more lung volume when running.

    One of your reader mentioned some Swiss equities that lost a lot of value due to SNB move to stop supporting the CHF. I would only recommend you to look at it, for example high dividend: Zurich Financial, Roche and Novartis for the medicament portfolio and long term growth. So come in Switzerland to support our market 🙂 and help me recovering…

    Cheers and take care

  41. Elvis,

    You must not have read the bottom of the article. These ethics discussions really add no value and they’re not on topic.

    Ethics are obviously opinionated. What’s ethical for you will be different for me. If people gain enjoyment from smoking, then I don’t think I have a right to trample on that freedom. The good news is that freedom extends to those who do not wish to purchase PM’s stock, like yourself.

    Take care.

  42. Mantra,

    I have liked PM and MO for a while as stocks, but have never pulled the trigger. First reason is I only have so much to invest, but the other reason is I have a hard time getting over the moral issue. Plus my wife gave me a load of stink eye when I floated the idea allowed. I must agree with you though, if I ever get over those roadblocks it would be a good day to buy some PM.

    Thanks for the article,
    – Gremlin

  43. M,

    Right. Tobacco usage will vary from country to country. Overall, volumes have been steadily declining in Europe on par with other developed areas. Though, that varies from country to country. But the decreases in percentage terms are slowing as one would expect. However, developed areas aren’t increasing in population as fast as emerging/developing areas, where smoking is on the rise. So I think that when you look at the big picture, the growth potential in growth markets like the Philippines and Indonesia outweigh the volume decreases in mature markets like Northern Europe. And PM’s numbers seem to realize that. Furthermore, e-cigs is a new product category that I think will eventually replace traditional cigarettes altogether. I now see people using them in all kinds of places where traditional smoking is banned. And few companies have the resources to start dominating that like PM. Things are definitely looking up here.

    Thanks for sharing!

    Best wishes.

  44. Sercagar,

    Thanks for stopping by from Spain. 🙂

    I think PM is a great company, though it’s interesting in that I’m not quite sure how much it’ll diversify your portfolio. Though it’s headquartered in the US and trades on our exchange, it’s not a US company. It generates 100% of its sales from outside the US. Nonetheless, I think it’s a great company trading at a solid value.

    Best of luck with the diversification!

    Cheers.

  45. Bryan,

    The company definitely has a very wide economic moat. And the potential of RRPs is pretty exciting. This is exactly the kind of growth category that they needed. The dividends should continue flowing for years. 🙂

    I’m probably not going to add to IBM. Just a weighting call. I really have enough there, especially with my desire to have no more than 2.5% of the portfolio dedicated to tech. I wouldn’t mind diversifying my tech holdings through a few very small positions there.

    Cheers!

  46. cazadividendos,

    It could very well drop below $80. Probably wouldn’t take much volatility in the broader market to do so. I certainly hope it happens for you. 🙂

    Best regards.

  47. Hi Jason. I have learned to trust your analysis, as you’re one to always do your due diligence. My personal feeling is that smoking may not be popular in the coming years (hey, let’s hope so). But you can’t argue with facts and figures, like you noted.

  48. Heiki,

    I wouldn’t really compare real estate and private loans to stocks. Very different asset classes with different risks, capital layouts, time horizons, liquidity, etcetera. In addition, I don’t know how anyone could say collecting dividends is as passive with collecting rent. I’m a renter who rents from a property owner. They’ve had to can two management companies who were incompetent. Now they manage the condo themselves. And if you think I don’t bother them about stuff, you’re wrong.

    All that said, I’m not here to convince anyone of anything. I share my journey, experiences, lessons, and results as I march toward financial independence by 40 years old whereby I’ll live off of my dividend income. You really must make investment decisions for yourself.

    In addition, there’s more than one way to skin a cat. I think that it’s likely that someone who’s buying rental properties will generate a higher ROI than stocks, as stocks have returned somewhere around 7% in real terms over the very long term. A smart RE investor will likely do better than that. But there are drawbacks there that I’d rather not deal with. I can gain real estate exposure through REITs with no issues. Realty Income Corp doesn’t call me when there’s a problem with a property. I just collect my income. In addition, I’m very liquid and can buy without large capital layouts.

    Best wishes!

  49. I like PM around $70. I have HSBC and BNS on my watch list. I already have IBM as my top 15 holdings. So nothing else I have to add to unless market correct itself in near term. Otherwise I will hold cash until opportunity arise.

  50. MDP,

    P/E expansion is just one way for a stock to appreciate, and that’s certainly what we’ve seen with MO. Meanwhile, PM’s valuation hasn’t changed much at all over the last few years. MO’s core results have been better as well, no doubt helped by the fact that they don’t face the currency issues that PM does. However, I think when you look at the breadth of operations, PM should do better over the long term. And that’s before factoring in the fact that one stock is overvalued and the other is undervalued. Just really a matter of markets they operate in. The US market is just unlikely to markedly grow ever again in regards to traditional tobacco, though the e-cig category is very exciting. And there’s the possibility they’ll be able to get into the marijuana business at some point as well, though I’m sure there’d be a lot of regulatory hurdles there. We’ll see. Either way, I’m glad to own both. 🙂

    Best wishes.

  51. W2R,

    What goes around, comes around. Probably won’t be an about face anytime soon, but I think PM will be just fine over the long term. Factoring out the currency effects shows very solid results for a “dying” industry. Even with the effects, I’ll gladly take ~6% growth with a ~5% yield.

    The China story is very interesting. Maybe it goes nowhere, but I’m optimistic since they’re the only foreign company (that I know of) with a licensing deal there. This kind of stuff takes time, but I can foresee a future where PM sells their product directly and freely over there. That would be massive. In the meanwhile, they’ll continue to do well with what they’ve got. I’m excited to see what happens with the RRPs. Even if their products bomb and go nowhere, they can continue to snap up the e-cig players in what’s a very fragmented market.

    Best regards!

  52. DGI,

    I hear you. I’m also not keen to list a “best idea”, but I’ve had a lot of readership interest in it. Thought it should be something that I may as well post a full article on instead of just replying to individual emails on. Obviously, we’re not in this for the short term. That’s a given. But I think PM is a solid idea right now, all things considered.

    MO has done incredibly well, though mostly through P/E ratio expansion. Underlying results haven’t been hindered by currency effects, so they’ve posted better numbers than PM over the last couple years. But currency effects can work both ways. What’s a headwind now can be a tailwind down the road. Just a few years ago they were talking about the USD losing its reserve status. Now it’s incredibly strong. It’s all cyclical. But I can’t imagine MO stays at a P/E ratio of 25 forever. That’s just insane if you look at its historical valuation.

    Thanks for stopping by and sharing! 🙂

    Best regards.

  53. ThomasDV,

    Wow. That’s a huge exposure to PM there. I’m not adding any more and my exposure is only about 1/4 of that. I guess we’re both riding this one out, though. I’m excited for where they might be 10 years from now. 🙂

    Cheers!

  54. My total portfolio is about eight times smaller than yours though so over time the weight of PM should reduce drastically.

  55. Chad,

    Looks good. Be careful not to go too heavy into telecoms, however. Great dividends to start things out with, which you can snowball into other stocks. But I can’t imagine those payouts growing much over the next decade or so. Even with the massive growth in wireless and data over the last decade, their results aren’t exactly stunning. Imagine what results will look like when the market is completely saturated.

    Have fun!! 🙂

    Best regards.

  56. Dan,

    Nice job there with JNJ. My largest single investment, so I’m not adding anymore. Fortunately, I was able to load up at much cheaper prices, especially around the ~$60 mark. But just a fantastic company. One of my favorite businesses, if not my favorite.

    Let’s hope the volatility really picks up. 🙂

    Best wishes.

  57. Any tips on where I can find a good website to find the growth rates on the stocks I am researching. I am in this for the long haul so growth is more important to me than current yield.

  58. Gremlin,

    You’re definitely not alone there. I certainly don’t begrudge anyone for not wanting to invest in PM, much like I would never begrudge anyone for choosing to smoke. Besides, more shares for me. 🙂

    Lots of stocks out there. No need to invest in a company if you’re not completely comfortable.

    Best wishes!

  59. Jason…..Great article and keep them coming. I love this stock as well. In India where I am from, smoking is widely prevalent and not ostracized as it is in the US. There is a growing anti smoking sentiment against tobacco but it is not as severe as the US.
    People who smoke buy local brands and put them in packs of empty Marlboro reds, because PM products are considered as status symbols in many parts. They love their Marlboro’s there.

  60. DB40,

    Yeah, I think that sentiment is mostly correct in mature and developed markets. Though, I don’t think it’s completely accurate in emerging/developing markets. Smoking is incredibly popular in Asia. Just a different culture over there. Meanwhile, RRPs are an exciting new growth category in the developed markets. We’ll see how it goes. 🙂

    Thanks for stopping by!

    Best wishes.

  61. AJ,

    The Canadian banks seem pretty attractive here. I definitely wouldn’t mind adding to my holdings in TD and BNS. RY also seems fairly solid. You’ve got a great yield there and fairly solid growth. Though, there are concerns over real estate, consumer debt, and the oil industry up there. Always pros and cons. 🙂

    Cheers!

  62. A really nice stock but I think it’s a little bit too expensive at the moment.

    What do you think of Albemarle Corp. (ALB)?

  63. ThomasDV,

    Ahh, gotcha. It’ll reduce over time then. I know PM used to be a much larger position for me as well in terms of percentage of the portfolio when the Freedom Fund was smaller. Even now it’s still too big, but, like you, I’m building around it and lowering that weighting.

    Best regards.

  64. “I’ll tell you why I like the cigarette business. It cost a penny to make. Sell it for a dollar. It’s addictive. And there’s a fantastic brand loyalty.”-Warren Buffett

    How can you go wrong with that logic and coming from The Oracle of Omaha.

  65. retiredat50,

    You could very well be right there. I wasn’t necessarily inferring that PM will grow dramatically in China. Rather, I was just indicating that it’s a lot of unleashed potential, if something were to open up there. They’ll be fine with the status quo.

    But I don’t necessarily agree that these issues are major roadblocks. The government is the roadblock. If things were to be wide open there, PM could easily adjust to the local market. They manufacture all kinds of different cigarettes for different markets. No reason they couldn’t do the same for China. And I can’t see why they couldn’t *gladly* come up with an idea for a very expensive, exclusive brand over there. Something tells me they’d be up to the task. 🙂

    Thanks for the perspective on the IQOS. I saw the information on the launch. Obviously, it’s difficult to separate company bullishness with real results sometimes, so that’s good news. Some of these new products are really interesting. I’m not a smoker, but I can see why smokers might be interested.

    Regarding Swiss stocks, they have unfortunately popped in a big way over here. NVS is up over 6% already YTD after the move on the CHF. Same goes for a lot of them. And I didn’t think there was a lot of value there before. I was stalking NSRGY for a while, but it’s just not in my wheelhouse now. Wish I could help out! 🙂

    Thanks for sharing.

    Best wishes.

  66. Mephi,

    Albemarle looks solid. The recent acquisition of Rockwood gives them a bigger foothold into lithium, from what I can see. Strong fundamentals, great growth, low debt. Not much to really dislike there. 🙂

    Take care!

  67. DGI under 25,

    Exactly. Addictive product with huge margins and brand loyalty. And I love PM’s commitment to returning all of its FCF to shareholders. Even just 6% dividend growth over the long haul, which seems pretty conservative, means this should be a great investment. 🙂

    Take care!

  68. PM is a great holding for me, no questions asked. As long as they maintained the dividend, chances are I will keep the stock. Most likely they will grow distributions and earnings over time in the mid to higher single digits as you mentioned, and this along with the nice yield could provide comfortable returns to investors.

    As for MO, I agree the stock went up a lot and looks a little pricey. However, the P/E is closer to 20-21 than 25. On a forward basis it is below 20.. PM does look cheaper than MO.

    Either way, I am surprised you are not getting more “ethics” comments. 🙂 I mean, don’t you like it when someone tells you that their ethic beliefs are more important than your ethics beliefs. 🙂

  69. I like the stock and its valuation but have moral issue for investing in it, especially considering my grandpa died from lung cancer. I just can’t put myself owning this sector. But when it comes down to it, some people may argue owning about just anything (i.e. pipeline, oil, etc). It’s really a personal choice on what you’re comfortable owning.

    It’s great to see that you have own a large amount of shares.

  70. DGI,

    Looks like you’re right there. MO’s P/E ratio is 21.80 based on TTM EPS of $2.48. Google has their EPS reported incorrectly. Always good to check directly. Although, that’s still insane for MO. That’s something like 40% higher than their long-term average.

    Yeah, the ethics stuff is funny. Some people think their point of view is so important and right that everyone should think and believe as they do. That’s the kind of stuff that you see in countries like North Korea and Cuba. You’ve got this perspective that’s shoved down other people’s throats. I can’t stand that. I say live and let live. Nobody is forcing you to smoke or invest in a tobacco company, thankfully. I agree with having different perspectives and opinions, but draw the line with forceful arguments one way or the other. You see that a lot in politics and religion as well, which is why I discuss neither here or in my real life.

    Best wishes!

  71. Tawcan,

    Sorry to hear about your grandpa. That’s sad. I can’t blame you for not investing there. The good news is that there are a lot of stocks out there. Nobody has to invest in anything they’re not completely comfortable with. However, as you allude to, every company could be villainized in some way or another. Really depends on your perspective.

    I also keep in mind that a lot of people die from lung cancer (and cancer in general) that don’t smoke.

    Per the American Cancer Society:

    “Staying away from tobacco is the most important thing any of us can do to avoid getting lung cancer. But it’s not a guarantee. Every year, about 16,000 to 24,000 Americans die of lung cancer, even though they have never smoked. In fact, if lung cancer in non-smokers had its own separate category, it would rank among the top 10 fatal cancers in the United States.”

    Source: http://www.cancer.org/cancer/news/why-lung-cancer-strikes-nonsmokers

    I try to take a pragmatic approach to investing, rather than an emotional one. But there’s no right way for everything and everyone. 🙂

    Thanks for stopping by!

    Take care.

  72. A brief view and I don’t like the numbers. Total debt rising, negative equity. Maybe is a high risk stock today. Although, nr of shares is declining fast, they must be making a huge buy back, which can turnout to be great in ner future.

  73. Nuno,

    I agree in that the balance sheet is a weakness. Though, I pointed out in the article it may look worse if you’re not familiar with how to read a balance sheet. The treasury stock (from the massive buybacks) is very high, thus the negative equity. But the debt/capitalization and interest coverage ratios are pretty solid. Loading up debt at a low rate to buy back shares that are paying out near 5% is a pretty good use of shareholders’s capital, in my view.

    The balance sheet is very similar to Pepsi’s, for the sake of comparison. Similar amounts of debt, similar sized companies, similar coverage ratios. I don’t find this a concern. Most major companies have been increasing debt over the last 5-10 years. If you don’t like PM’s balance sheet, you’ll probably like PEP’s even less.

    Thanks for dropping by!

    Cheers.

  74. Are there any dividend-paying coffee stocks out there? I’m sure its also relatively cheap and also addictive.

  75. Good news for us KMI holders by the way, next dividend is up 10%!

    Kinder Morgan Increases Quarterly Dividend to $0.45 Per Share, up 10%

  76. Never mind, they were comparing the dividend to the dividend from last quarter lol. Actual increase is one cent per share.

  77. One consideration for these kinds of companies is that they will now have much heavier FDA regulation. More similar to how pharma is regulated.

  78. Joel,

    SBUX is one on my watch list. The yield and value isn’t nearly the same as what you get here with PM, but its growth prospects are probably much greater. Hope to initiate a position at some point, possibly this year.

    Best regards!

  79. Kevin,

    PM doesn’t operate in the US, so they’re not susceptible to FDA regulation. But other countries throughout the world have their own versions of an FDA, which affects them. I listed regulation as one of the risks present here, which has manifested itself pretty strongly over in Australia. If plain packaging spreads, that could become a major concern.

    FDA regulation would be more of a concern for domestic tobacco stocks like MO and LO. But it’s something they’ve been dealing with for a long time now.

    Take care!

  80. Have you ever considered buying NYRT for this new year? I am very tempted to get on it for its dividend. I am just hesitant for its short history in stock market. But from the way I see it, REIT is usually fruitful for long term investor.
    What do you think?

  81. Well I’ve recently bought PM so it was great to read this post. Hopefully it’ll do well for us. Cheers.

  82. Marco,

    After the recent ARCP debacle, I won’t consider any REIT (or probably any company) without some type of substantial track record of profitability and increasing dividends. That’s really always been my mantra, but I’ve made a few exceptions over the years. I’m now getting back to tightening the ship. Anything can happen to any company at any time, but a lengthy track record of success is a good proxy for quality. I’d rather miss out on some gains than land a big loss. I’m looking at some REITs right now, but mostly in the healthcare area. HCP, VTR, OHI, etc.

    Cheers!

  83. Nick,

    Glad to have you as a fellow shareholder. I’m certainly not making any guarantees for this year or any other, but I’m also putting my money where my mouth is. I truly believe PM will deliver above-average dividends with satisfactory growth as well. If every stock could offer a yield of near 5% with growth of ~6%, I’d be a very happy investor. 🙂

    Best wishes.

  84. I like the PM idea. It got a bit extended on a P/E valuation about 2 years back, the USD became strong and as a result, it has traded sideways now for a long time. P/E has come down from the high and hopefully the USD will come back soon. Both bode well for the stock. Like you, I also own a fair amount of PM and some LO so I think I have enough exposure to the cigarette space. I will keep an eye on it though for a future investment idea. Thanks for the information!

  85. Hi Jason,
    I’ve read many of your posts, you’ve made tremendous progress since you’ve started. It’s awesome and inspiring to see somebody building their wealth so quickly in such a short time.

    One of my collegiate invest through a company that only invest in “morally sound” companies. I thought it’s a great ideal. But I don’t know if it’s excusable. But they’d go like this they’d buy target and costco instead of walmart, because TGT and COST treat and pay their employees better. Say in this case he is a health care professional, he’d tell his patients to quit smoke, but if he invest in a company the promote smoking, he’d sound like a crook. Is he able to control what in my 401K and the mutual funds that my company provide? Not so much, but he would like to minimize it as much as possible. So in his personal accounts, he invests in this management company that invest only in “morally-sound” companies. I think it’s reasonable. But I’m doing-it-myself, and I don’t know which company is which, just yet. Who’s know what’s corporate greed would do behind the scene.

  86. I always knew SBUX had a low yield, but I never really paid attention to their dividend increases. Their last 4 dividend annual dividends have increased by at least 24%. They also currently have a payout ratio of only 39%.

    If only we had invested in SBUX 3-4 years ago… Next best time is now.

    So many good stocks, so little money…

  87. Not sure if you ever visited Marlboro’s website, but they routinely give out free stuff to people on their mailing list. My friends sister won a trip to Montana. I never won anything that big but I’ve gotten a cool dart set, a bunch of bottle openers and the most badass coasters ever (they are shaped like records and made of vinyl). I don’t smoke and neither does my buddies sister, FYI.

    One other thing I think about when it comes to the tobacco companies…when marijuana is eventually legal throughout the country, one (if not all) of these comapnies is very likely to step up and sell it. The potential growth there is insane.

    My 2 cents.

  88. Ok, I read about treasury stock in wikipedia. It seems to me that those shares should have soma value since they can be re sold but, anyway, I’m pretty far for being able to read a company report and fully understand it.
    Isn’t the company allowed to resell those shares?

  89. ADD,

    Agreed. The valuation got a little stretched there a while back. Now it’s definitely re-entered value territory, in my view. We’ll see. If they continue trading at this level, I wouldn’t mind at all. Even though I don’t plan to buy any more and the price won’t really affect me, the buybacks will be more effective with PM at $84 than it would with PM at, say, $94.

    Thanks for dropping by!

    Cheers.

  90. Vivianne,

    Thanks for the readership. I appreciate it. And I’m glad you’ve found some value in some of the posts. 🙂

    I don’t think there’s anything inherently wrong with trying to invest solely in those companies that are “morally sound”. I think the problem comes down to where you draw the line. In the end, what one person thinks is morally sound and what another person may think will likely be far different. Furthermore, we don’t really know all the ins and outs of many of these companies and how exactly morally sound their decisions and business relationships are.

    For instance, you could go with TGT and COST over WMT for employee treatment. But another person may argue that WMT is actually more morally sound as they employ far more people who may not have other opportunities available to them, thus allowing these people to put food on their respective tables. Or you could say that the company that squeezes their suppliers the hardest to provide the best bottom line to their customers is the most morally sound, thus allowing more cash in the pockets of those that shop there. I could go on. There’s a lot of ways to look at something like that. It’s a huge gray area.

    The best you can do is be able to sleep at night. If you don’t feel comfortable with a company for any reason (moral or not), it’s probably best to move on. Too many stocks out there to suffer for no good reason.

    Best regards!

  91. blahblah903,

    Hmm, that’s really interesting. Thanks for sharing. Never been to the website before. I may have to look into that. Free stuff is very cool. I could always sell it if I don’t want it (I probably won’t want it). 🙂

    Yeah, the marijuana potential is really interesting. I was mentioning that in another comment somewhere about MO. I’m not sure if there’d be any regulatory hurdles there as it’s pretty new territory. But it’s something I’m very hopeful about. I would love to see a world where it’s legal across the entire country, taxed heavily, and Altria manufactures/markets a good chunk of it. A perfect world!

    Thanks for sharing.

    Best wishes.

  92. DM,

    Two thumbs up with this recommendation. I’d add a couple big toes if it drops below $80 as well!

    Like you I’m heavy on PM right now, though at 67 shares I’d be willing to eventually push that to 100 shares before turning off the faucet. With UL I was adding under $40, and likewise I’ll slowly add to PM under $80.

    Here’s to an awesome 2015!

    Best,
    DWC

  93. Nuno,

    Thanks for catching that! I didn’t update the calculator for the shorter time period. I’m so used to using 10-year numbers that I didn’t change it. My bad!

    Thanks again. 🙂

    Cheers.

  94. Wayyy back in 1996, 97, 98 my brother smoke enough and collect enough of malboro carton to get “great items” from them. I secretively want those items too, but I didn’t smoke and still don’t. 😛

  95. I’m a big fan as well, ex-CEO William Weldon went to my alma mater and spoke at my graduation, been buying ever since!

  96. The stuff you get is typically of high quality too.

    I don’t currently have any exposure to tobacco. PM is definitely going to end up in my portfolio. What would you pick as a second stock? MO? RAI? Something else? I think 2 companies is my limit for now but I do want a second company in the event that one is able to get into the MJ business before PM.

  97. Got fed up and finally initiated in SBUX and WFM this year. Neither was a good value by traditional metrics, but both are growing free cash flow and the dividend by solid rates in their respective industries, and I can see valuation staying relatively high for years to come until they are much closer to maturity.

    WFM has been terrific and up over 20% since last summer, while SBUX is flat (although that was a very recent position).

  98. Little bummed my dividend hero chooses this stock over others. I love it when you pick stuff like Unilever and I can justify myself eating more ice cream from being a shareholder. You have to think the bigger in popularity you become , the more people you could disappoint with investing in companies like tobacco.

  99. Hi Jason! I have Philip morris international on my watch list. I have actually been waiting for it to go on discount before picking up some shares myself but it doesn’t seem like it will be any time soon. I’ll keep an eye out for it!

  100. Trevor,

    Sorry to disappoint you, bud. But I think you have to realize that I’m not out to not disappoint others with my stock selections. I’m out to achieve financial independence by 40 years old. If that means investing in companies that others don’t agree with, so be it. I probably wouldn’t agree with a lot of your personal choices as well.

    I appreciate freedom in the world. I find it strange that people who live in countries like the US love freedom but then get bummed out when others exercise their freedom to pick the stocks they want and/or buy the (legal) products they want. It’s almost like one person’s perspective should override others. I never see people commenting how bummed out they are when others invest in alcohol companies knowing the addictive qualities and dangers of those products.

    Nobody is forcing you to buy PM or smoke cigarettes. That’s called freedom. It extends both ways.

    By the way, I’m a little bummed out you chose to comment on the ethics/morality of investing in tobacco when I specifically mentioned I’d prefer that you didn’t since it adds no value.

    Take care.

  101. Jeff,

    I personally think it’s at a discount right now. But a market-wide pullback could certainly bring it even lower. I think you had an excellent opportunity at ~$80/share just a couple weeks ago, which was ~5% lower than it is right now. Be careful not to wait, wait, wait for an extra $0.50 deal on a stock that may never come. A $1 or $2 difference on your cost basis in PM won’t make a difference 20 or 30 years from now. 🙂

    Thanks for dropping by!

    Best regards.

  102. Good stuff as always, DM. I have Philip Morris Intl on my radar but not too long ago I bought 100 shares of Altria. I was intrigued by their 27% equity stake in SABMiller as well as their burgeoning smokeless and also e-cig business in addition to their ability to raise prices and maintain market share in the US. Tobacco in general is in decline, but I liked what Altria was doing to create some more revenue streams.

    At some point I’m going to get me some PM as well, although I want to spread the capital around in other industries first before I return to Tobacco.

    Incidentally, you have been a major inspiration for me as a young investor. I started much later than you, it was actually about 5 months ago, in large part due to reading this blog. I’m 34, so I get that I am behind here. In the last 5 months, I’ve sunk about 50k into high quality dividend stocks (all but one are Dividend Aristocrats) and I plan on adding an additional 15k in the rest of the year (and probably about 7k a year thereafter). I’m a lawyer at a state agency. My goal is to retire in about 21 years with my state pension providing about 55% of my salary at that time with dividend income helping to fill the gap of the other 45%. While I wish I started investing earlier, I think having another 21 years to allow my investments to grow will be sufficient. Thank you very much for your wonderful blog. You are doing an incredible service. I wish you the best in 2015. Hopefully we will see the Freedom Fund hit 250k this year!

  103. Mike,

    Hey, thanks for the comment there. Appreciate the kind words and support. I’m incredibly glad that I’ve served as some inspiration there. It sounds like you’re off to an incredible start over there. You may be a couple of years older than me, but you’re really not that far behind. Putting away $50k into stocks in just five months is an incredible start! That gets things rolling for you right away. And your 21-year time frame gives you an incredible runway. You also have access to a pension down the road, which I lack. I’d say you’re in pretty good shape. 🙂

    I like MO as well and own it. Though, I think, valuation-wise, PM is the better bet right now. It simply sports better fundamentals. And the dividend also has a lot more room to grow as there’s a pretty strong gap between the payout and FCF for PM. MO’s FCF isn’t covering their dividend by a very wide margin, so I anticipate that, looking out over the next decade or so, PM will not only grow their dividend at a faster rate, but also provide far more in aggregate dividend income since the starting yield is about 100 basis points higher. But we’ll see. The good news is that you don’t have to pick just one. I’m very happy to own both. 🙂

    Thanks for dropping by. Stay in touch! And keep up the great work.

    Best wishes.

  104. I never understand the rationale of don’t invest in the companies that produce things that aren’t healthy. If you sell your shares, by definition your handing them to someone else who will be happy to have them. It doesn’t have any actual affect on the company. If people don’t like PM, help people stop smoking and the company will lose that way. A perfect example is Seaworld. A documentary like Blackfish comes out, park attendence tanks, and the shares of the “bad” company go down the tube. The company is punished as are the shareholders.

  105. I think PM is a strong pick for 2015. The dividend yield is strong, but cash flow and earnings have declined, largely due to currency issues. If the USD continues to rally you will see more downward pressure on earnings and FCF. Personally I would like to see them focus more on bringing down the debt levels (or at least refinancing) than more buybacks. I’d caution anyone initiating a position in PM to do so slowly. No more than 1/2 now and half after earnings in February.

  106. I just picked up 1k shares of PM @ 82. PM and BP were my two big purchases for 2015. I am a buy and hold forever type investor.

  107. Based on everything you stated, PM seems like a great pick. Only downside (as you mentioned) may be the fact that it is a tobacco company however there are companies like Coca Cola, McDonald etc.. that sell pop and junk food targeting young children. I don’t see PM is doing anything ethically wrong. Whether to purchase their product is a personal choice. Wouldn’t America built on the foundation of ensuring individual freedom?

    Cheers,

    BeSmartRich

  108. I’m seeing the strengthening USD as a benefit to PM. Crazy, am I? Well, no. The perception of an ever-strengthening USD is already priced into PMs revenue numbers. Today, Draghi announces a QE package and the Euro drops a half point against the dollar. Can this decline be interminable? Not a chance. For us long-term investors, buying now, when EPS out year estimates are depressed due to today’s exchange fluctuations should be seen as a buying opportunity.

    Thanks for the article.

  109. It may only be a $.01 increase sequentially, but it is also a 9.8% increase over last year’s payout made in January, 2014. $.045 this next payout vs. $.41 in January 2014.

    We SHOULD be looking at it both ways. 🙂

    KMI is and should continue to be a dividend growth monster for the next 5 years at least. Estimated payout for all of 2015 is $2.00 per share, which at yesterday’s closing price of $42 would equate to a yield of approximately 4.76%.

  110. Thanks for sharing this stock idea. I get the impression that PM and other tobacco companies are always finding ways to reward shareholders handsomely. I wonder what the future holds for e-cigarrettes, it looks like an interesting alternative to the standard cigarrettes.

    On a side note, sorry I haven’t commented here in a while. We were visiting family and didn’t have access to wifi.

  111. But PM is not an ethical choice!! (joking! 😉 ) It’s not in my top checklist, but I see why you picked it. My top 4 for this year are AAPL, BLK, GRMN and GPC. We might just be looking in different sectors…

  112. Adam,

    Agreed. Like many other major companies out there of its size, PM’s debt load has ballooned over the last five or so years. I don’t think it’s necessarily a problem, and sports similar metrics to, say, Pepsi. But I also don’t want to see it continue like this. The same could be said for many other companies as well who sported much healthier balance sheets 10 years ago. However, it’s smart to retire expensive equity with cheap debt.

    The currency effects will hinder PM, but they’ll hinder most major US multinationals as well. Most US blue chip companies do business all over the world, so this is just more of the same. PM is a bit different because they do all of their business overseas.

    Thanks for dropping by!

    Best regards.

  113. frankz,

    Nice! I don’t think you’ll be unhappy with that big buy when looking out over the long haul. I can’t imagine you sitting down 10 years ago and thinking how much you wish you wouldn’t have plunked down the cash on PM shares. 🙂

    Glad to have you as a fellow shareholder!

    Cheers.

  114. BeSmartRich,

    Indeed. Ethics are a big gray area. What’s moral for one person might be immoral for another. And that’s why I don’t enjoy when someone else who thinks their views are correct tries to shove those views down my throat.

    Take care!

  115. Eric,

    I’m honestly not all that worried about the currency issues. If I were a trader, I would be. But as a long-term investor, it’ll all balance out in the end. Most major US multinationals are affected in a big way by currency effects, so PM isn’t alone there. The big difference for them is that they do all of their business abroad, so they don’t have the business in USD as a hedge. 2014 was an investment year for the company, but I think 2015 will be when we start to see some of those investments bear fruit. I’m excited. 🙂

    Cheers!

  116. GG,

    Agreed. I generally look at it both ways as well, though the actual increase to my income is recognized in a cumulative, sequential way. Each time the dividend increase is announced, my income goes up by whatever percentage is reflected in the raise. But the YOY results are still tracked, and, for KMI, fantastic. 🙂

    KMI should do very well for dividend growth investors over the next 5 years and beyond. The planned dividend growth of 10% until 2020 is simply amazing when you look at the yield.

    Best regards.

  117. Spoonman,

    Hey, no problem about stopping by or not stopping by. Who wants to be tethered to a computer all the time when they’re FI? That’s why we leave the workforce, right? 🙂

    I remember reading about the old Philip Morris as it was discussed in “Stocks for the Long Run”. Wouldn’t believe it was the best stock of all, but it seems it was precisely so because investors doubted their ability to grow and deliver returns, leading to a chronically low valuation. I hope everyone who has a problem with the ethics of the company remain on the sidelines. That reduces demand for shares, which means more of the same.

    Best wishes!

  118. Mike,

    Ha! 🙂

    I’m looking at a couple of those too. I like the asset managers and none are bigger than BLK. AAPL is a company I may invest in. I’ve long resisted tech, but my portfolio has grown to the point to where I think I can take on a few investments there. Apple is probably one of them.

    Happy shopping!

    Best regards.

  119. William,

    Agreed. BNS is attractively priced here. Though, its drop seems somewhat warranted with some of the headwinds going on up there. Their economy is mostly based on resources, and that’s obviously an issue right now. That’s compounded by high consumer debt and a possible real estate bubble. But as a long-term play, it seems very solid.

    Cheers!

  120. But Jason, cigarettes KILL! They want to give all their customers CANCER, laughing over the bodies of their victims as they make their profits! Why do you SUPPORT MURDERING INNOCENT CHILDREN!?

    Actually, all jokes aside, I do understand and respect why someone wouldn’t want to have any dealings with these companies. I doubt any of us like the addictive nature of their products (regardless of whether it leads to a loyal customer base or not). And I can definitely respect that people will have companies/sectors they avoid for ethical reasons. I myself won’t touch defense companies, such as Lockheed Martin and Raytheon. But that’s my own preferences and I wouldn’t presume myself right and others who do invest (such as yourself) wrong or beneath me? Like the resident said in “Mars Attacks”, can’t we all just get along?

    So some of the people who commented here have to realize that just because you are against something ethically doesn’t mean you are right and everyone else is wrong.

    The Conservative Income Investor once did a post about ethics and investing. Maybe that would be a great topic for you.

    On a completely different topic, what do you think of JNJ’s valuation right now? I read an article or two that had it as overvalued, but it’s comfortably below the P/E of 20 rule that many , including myself, use. I wanted to know what you thought of it at its current price.

    Thanks, and remember, stop giving children cancer with your EVIL cigarettes!

  121. What do you think about MCD at these levels? Is there a quality issue? Otherwise the valuation looks pretty tempting!

    PM is already 8% of my portfolio! 🙂 I will only purchase more if the price drops below 75 (PE<15).

  122. Joey,

    Ha! I thought I was doing a lot of good in the world by helping others improve their financial futures. I forgot all about the murdering of children.

    Great suggestion there. I’ve been meaning to tackle the ethics aspect of investing for some time now. I just always end up with something else to discuss. In addition, I’m not sure how much value I can provide there, as everyone has their own opinions on it. Nonetheless, it’s perhaps something I should put together at some point here in the near future. 🙂

    And you’re right. What one person is comfortable with, another might not be. Some are comfortable with weapons manufacturers, some aren’t. Same goes for just about any other industry. I don’t personally bring emotions into investing and choose a rather pragmatic approach. That applies to ethics as well as everything else. Keeps me very levelheaded. 🙂

    As far as JNJ goes, I think it’s more or less fairly valued. I don’t see why the company can’t continue growing at ~7%, which would mean it’s about fair here. Nothing wrong with paying a fair price for an excellent company like Johnson & Johnson. It just doesn’t go on sale very often. I was lucky to load up a bit when they had those recall issues. If something like that rolls around again, it could be a great opportunity.

    Best wishes!

  123. A.Johanson,

    I hear you there on PM. I’m in the same boat – too much of the stock. A good problem to have, however. 🙂

    I’m not sure about MCD. I think they need to improve the business model. If my opinion mattered, I’d focus on customer service, food quality and/or food quality perception, and the simplification of the menu. It seems like they’re doing some of this, though I think their customer service could be vastly improved. But SSS trends aren’t great. And they can’t grow as fast in the future through store openings as they have in the past. I think it’s a fair long-term investment and the yield is great. Even if they’re only able to raise the dividend by 5% over the long term, you’re still looking at pretty solid total returns there, assuming a static valuation.

    Cheers!

  124. Hi Jason,
    and what is your best idea for 2015 in terms of your own portfolio? As you said, your have a comfortable position in PM now, but what stock would you consider to go strong on this year? Anything new or rather increase existing positions like Unilver?
    Regards,
    Ben

  125. Ben,

    I don’t really know if I see anything that blows me away right now. I see some value in energy, though I’m overexposed there. Same with PM. I’d like to add to some healthcare REITs, though they’re not particularly cheap right now. IBM seems undervalued by a wide margin, but I have all I need there. It’ll probably be just picking opportunities as they come.

    Most of the areas that I’d like to really add to, like healthcare, aren’t really offering me a lot of value right now. As my portfolio grows, I’m less enthusiastic about going overboard in certain sectors or with certain stocks, as it takes longer to correct the allocation and I have less time to do so. Some of the financial stocks and industrial stocks look pretty good here. That may be where I go next. BNS, CAT, and DOV all look fairly solid as of right now. That could change by the time I’m ready to buy again, however.

    Best wishes!

  126. Hi Jason,

    Hopefully you can explain something to me. This is not meant as an attack, just a question since I sincerely do not understand your portfolio management decision.

    After running my own numbers on your portfolio, your weighted annual yield is 3.42% (marginally beating historical inflation). An ETF such as SDIV does what you are attempting to do, but returns about twice your yield – 6.45%. The S&P 500, with dividends reinvested (since you started your blog), has an annualized return of 14.33%. Even since 2000 (including the tech-bubble burst), the S&P returned 4.28% annualized with dividends reinvested (returns are 9.66% annualized since 1990).

    Why are you not all-in on SDIV? Or, better yet, why are you not actively managing your portfolio using index-tracker ETFs such as IVV or SPY, and then investing in SDIV when you want the stable dividend payout? SDIV is lower risk, with double the yield. I just don’t understand.

    Thanks!

  127. Bravo.. What I’ve been reading before from Jason his posts is the flexibility he has to remove bad performing stocks, by just selling them. Also the indexes require fees.

    Jason that Bank of Nova Scotia (BNS) stock is what I’ve bought today. Its doing extremely well and the price of the stock keeps climbing up. By the way did u know that the dividend gets raised twice a year? Been reading somewhere that it was this past 12 months.

  128. Right, but why bother with removing bad performing stocks, when someone who is much better versed in stock performance can do it for you? Also, he can avoid the $8 transaction fees (just a one-time charge to get into the fund, rather than $8/stock to rebalance his portfolio). The expense ratio on IVV or SPY is around 0.09% – practically nothing. The expense ratio of SDIV is currently 0.58%, but for twice the gains and an increased exposure to better companies more than makes up for the difference, in my opinion.

    Maybe there is something more I am missing. I am really curious to hear Jason’s thoughts.

  129. Nice article -as always- about PM.

    My toppicks for this year: 1.ARII, 2.BBL, 3.JNJ, 4.WFC, 5.MCD

    ARII. American Railcar Industries. Since the introduction of the service contracts to maintain railcars for it’s customers, the dividend exploded and gives solid earnings to maintain the dividend. Extremely Low priced. Gives me exposure to the railindustry and not buying NSC, UNP, CSX, which are becoming quite expensive.

    BBL. BHP Billiton. Last 10 years the dividend increased every year significantly. Low pay out ratio. Stock is depressed, because of the rapid decline of the commodity prices, but when returning to normal prices, it’s definately a bargain.

    JNJ. Johnson & Johnson. Great dividend record. Pharmaceutical division is booming with dividend poppers like Remicade and especially Simponi, Stelara. Reason why the stock went down when revealing Q4 earnings were bad results from the medical devices and diagnostics devision and the 1.2 billion write down for the integration of Synthes. The write down doesn’t affect the cash flows and thus the dividend. Already more than 5 years long!

    WFC. Wells Fargo. Best and most profitable bank in the US.

    MCD. Mc Donalds. Ok, the company is in a little bit of trouble. Although the problems MCD is faced with, ROE is still extremely high. MCD is fourth on the list of Dogs of the DOW.

  130. Bravo,

    SDIV? As in the SDIV that has returned a -4.9% before dividends since inception (June 2011)? Really? If I wanted my largest position to be a low-quality stock like Frontier Communications, I could easily do that myself and avoid the 0.58% expense ratio. Why would I want to pay a fund to buy the same stocks I can buy? I could easily achieve a 6% yield on my portfolio, but I’d be sticking to a very small batch of stocks and I’d also be lowering the quality bar while also raising the risk. By the way, 0.58% on a $500,000 portfolio (what I’ll likely have when I’m 40) is $2,900 per year. I’ll be paying practically $0 once I’m living off of my dividend income.

    I’ve already discussed this question ad nauseam on the blog before. A simple search using either of the two search bars would have already answered this for you:

    https://www.dividendmantra.com/2013/04/why-i-vastly-prefer-dividend-growth/

    Cheers.

  131. William,

    Great job there with BNS. I own a small position there. I may add to it, but, like I mentioned, there are substantial headwinds to consider up there. But I think the drop in valuation more than compensates for that.

    BNS, like most other Canadian banks, kept their dividend static for a couple of years during the financial crisis. But they’ve been increasing it since then and twice a year since 2012. The overall dividend growth isn’t significantly high, but it’s very attractive considering the yield here.

    “Its doing extremely well and the price of the stock keeps climbing up.”

    I think that depends on your perspective. It’s down almost 25% over the last six months, which certainly isn’t up. But, as I mentioned, I think that drop compensates for the additional risk and then some. Seems like a solid pick here. 🙂

    Best regards!

  132. AD,

    I like the picks. I don’t follow ARII, but I own and follow the other four. I think BBL is probably the best value right now out of those, but I’m just not sure when it’s going to come back. I imagine the lower iron ore and oil prices are going to be coming through to the earnings statements, which we may start to see when they report H1 results. But over the long term, I think they’ll be more than fine.

    MCD has a solid business. Another mature cash cow. I’m concerned about future growth in a world where cheap, mediocre food isn’t the selling point it used to be and future store growth will naturally slow considerably, but they can turn it around. Better customer service, a more focused menu, and advertising focused on quality perception would probably go a long way.

    Thanks for adding your ideas. All good stuff there. 🙂

    Best wishes.

  133. Bravo,

    I also noticed that their distributions have been declining since 2012. I’m investing in dividend growth stocks (emphasis mine). Inflation will eventually eat that 6% dividend up over time if it continues like that. Meanwhile, my income is growing somewhere around 7% through dividend raises alone, which trounces inflation over the long haul.

    I have no idea why anyone would want to pay a 0.58% expense ratio fee for a low-quality ETF like SDIV when they could just as well own an S&P 500 index fund for a fraction of that and receive better total returns.

    Cheers.

  134. Hey there, I like what you’re saying about PM, but lately I’ve been wondering about ethical investing. For example, I hold Lockheed Martin and McDonalds in my account, which are both extremely profitable, reliable dividend paying stocks with future growth potential. But, they without a doubt cause plenty of harm in the world. What’s your take?

  135. I’m definitely a more aggressive investor, but I don’t see how PM could generate growth. I know, you will tell me dividend will grow, but what about the stock price? If EPS doesn’t go up, there is not much PM can do. It lags the market by more than 40% (total, excluding dividend) since 2012, that’s a lot!
    You shouldn’t resist tech (not like AAPL anyway), they show high cash flow and great growth potential.

  136. jackiebolen,

    Thanks for dropping by!

    Ethics are a very gray and subjective area. What’s ethical to me might not be ethical to you. So it’s not really something I can answer for you. In the end, you have to invest in what you feel comfortable with. If you somehow suffer from guilt or can’t sleep at night (I don’t), then it’s probably not worth it. It’s really a personal call.

    Best regards.

  137. I listened to NPR today, they were saying there is a study that show electronic cigarette can also cause lung cancer due to the formaldehyde. I don’t know I’d PM owns the e-cigarette or not, but I know they are the biggest nicotine (drug) manuafacture providing patches and lozenges. I guess one can argue to do try to get people off the cigarette. 🙂 as of now, if a bit uncomfortable table buying macdonal, coca cola (my favorite bevage growing up, it was such a treat, but modern American, we just drink it too casually, and make us fat). I also stay away from drug company, for conflict of interest.

  138. Mike,

    1. PM’s generated 12% CAGR growth over the last five years, even with all the currency problems. Factor that out, and it would be even more impressive. If that’s not growth, I don’t know what is.

    2. PM has beaten the market over the last five years. We can pick different time frames to make our points, but you really feel two years says a lot? I thought you were a long-term investor? Nothing very long term about two years.

    3. I would prefer PM’s price stay low. That allows me to accumulate more shares if I so wish and it means the company can compound its shareholder returns at a greater rate by retiring more equity at a cheaper rate. Read up on why Philip Morris was the best stock to own for 50 years on how that works. Low valuation and high yield compounding over many years works very well. Why would I want PM to shoot way up? What good would that do me? Like Buffett, I prefer shares stay low in price while accumulating them. That goes for any stocks I own, as well as any stocks I want to own.

    4. I also don’t care about lagging the market or any of my stocks lagging the market. See point 3. I’m after income and growth of income. Cheaper stocks fulfills that goal much better than expensive stocks.

    Cheers.

  139. Vivianne,

    The e-cig market is still nascent. I’m sure there are some products out there that aren’t all that great for you, especially since it’s not regulated very heavily and highly fragmented. A lot of cracks to slip through. And we’re still talking about inhaling stuff here. I don’t think e-cigs are meant to be as healthy as a plate of broccoli. But a lot of people are more likely to use an e-cig than eat a plate of broccoli. So be it. I don’t personally have a problem with that.

    I’m sure the regulators and the companies will figure out the chemicals over time. It’s not like all the stickers you now see on cigarettes were there 60 years ago. Doctors used to recommend cigarettes back in old tyme commercials, if I’m not mistaken. Times have obviously changed. Same will happen with e-cigs. The tighter the regulation, the better it is for the bigger companies.

    But, like I’ve said a few times now, you have to invest in what you’re comfortable with. Owning a chunk of PM certainly doesn’t keep me up at night. Consumers enjoy their products and I’m okay collecting dividends from that. If you’re not comfortable, you’ll probably want to avoid it any any other companies that make you uncomfortable.

    Best wishes!

  140. Jason,

    I’m an avid reader of yours and just wanted to say I’ve enjoyed this post a lot (despite all the ethics). I hope there will be more posts like this. It really helps me learn as a beginning dividend growth investor!

    I’m in the process of deciding what stock to purchase next. There’s just so many solid companies to choose from, so I’m going to try to pick your brain a little bit. What 3 stocks would you buy today if given immediate capital and why? This is purely out of curiosity and to continue to learn.

    Dividend Newb,

    Melissa

  141. Melissa,

    Glad you found some value in the post. 🙂

    There’s a lot of stocks out there. Especially when you’re just starting out, because your portfolio is wide open. There’s really no right or wrong stock at any given time. As long as the value is attractive, the quality is high, the yield fits your criteria, the growth is there, and you have the available capital and room in your portfolio, then it’s probably a good idea to pull the trigger. That said, if I were just starting out right now with a completely empty portfolio, I’d probably buy JNJ, PM, and KMI. Three different industries, the valuations are fair, the overall combined yield is attractive, and the quality across the businesses is high.

    If you’re asking me what I’d buy for myself today, it’s hard to say. I’m honestly not sure what I’m going to buy next. I’m hoping to add more industrial plays. I’m looking at DOV, CAT, PX, and a few others in that space. I’d also like to increase my healthcare exposure. I may kill two birds with one stone by adding to OHI or perhaps picking up HCP. The Canadian banks seem pretty solid here as well. Just some ideas off the top of my head. UPS dropped quite a bit today. That’s another I’d love to pick up at some point.

    I hope that helps. 🙂

    Best regards.

  142. SkywalkerHH,

    Thank you. Glad you like the blog. 🙂

    I’m not sure what you’re asking there. What is epoxy? The only thing I was able to pull up is a penny stock with the ticker “EPXY”.

    Cheers!

  143. DM…what do you think of having a significant portion of a portfolio being comprised of PG and JNJ. I like both companies a lot long term, but if I buy about as much as I want of each (roughly 80-100) shares, it would seem to be deploying too much in the consumer goods area. I know JNJ also has pharmaceuticals. If I bought those amounts of shares of each, combined it would be a little less than 30 percent of the portfolio. That’s a bit high.

  144. Mike,

    That’s not really a problem for me, but you’ll have to gauge that risk for yourself. 100 shares of JNJ would run you a bit over $10,000 and 100 shares of PG would run you about $9,000. So that’s $19,000 there. If you’re saying that’s 30% of the portfolio, your portfolio size is about $63,000. I wouldn’t buy any more after that, but that doesn’t sound that crazy. Your portfolio will grow around those positions and the weighting will drop. I think PM was around 10% of my portfolio at one point. Same for JNJ. But they’re near half that now as I’ve bought stocks to fill the gaps around them.

    For instance, someone just starting out will have a 100% weighting to one stock. Then 50% to two. So on and so forth. I don’t know what you’ll need to live off of in terms of dividend income, but your portfolio size will probably be 8-15 times that large before you’re done. Like I said, I just wouldn’t buy any more after that. I’m not personally buying any more JNJ and I also have 100 shares.

    Hope that helps!

    Cheers.

  145. Hello!

    Great site! Congratulations!

    Did you already consider National Grid plc and/or SSE plc. Both utilities, both with high dividend yield. In case of SSE plc around 5,7%.

    In any case all the best!

    Thorsten (Berlin, Germany)

  146. Oh, I might add that I do not hold them, just wanted draw your attention to them because of the attractive yield paired with relative safety of a utility (british based as well = tax advantage).

    My portfolio is … well … full (I just wrote something about it in the main thread)

  147. Thorsten,

    SSE doesn’t trade on our exchange over here. At least, not from what I can see.

    NGG seems pretty solid. But I think the valuation is way too high here, like most utilities. I’d have to see a substantial pullback in its shares before even considering it. Utilities, in general, aren’t my favorite stocks because their growth is regulated away. I’m not just after current yield. I want plenty of growth too. And most utilities are handicapped in that regard.

    But if/when interest rates rise, I suspect utilities would become less attractive. And that may present some opportunities.

    Best regards!

  148. What struck me about this article is how you’d never see a pick like this in a “typical” investment website. PM is just not sexy enough. Not looking to double your money in a year? Catch the next “hot” tech or fashion wave? Buy a stock because of a good valuation, nice yield and steady performance expectations? How boring!

    Of course it’s music to the ears of us DG investors. I held back at first from a tobacco company out of moral squeamishness, but came to the conclusion that it’s a silly attitude. When PM dipped, I jumped, and expect to add with my next accumulation of dividends if the valuation stays good. Good call & good article.

  149. Chris,

    Exactly. I’ve actually been asked to write for a few sites out there that like to drop those “Double your money in the next six months!” type of headlines and I’ve passed. Just not my thing. I’ve never tried to show this strategy as anything other than what it really is. I’m out to show real investments with real results. Although PM might not be sexy, the old Philip Morris was the best possible stock to own from 1925-2003. High margins and an addictive product go a long way. 🙂

    Glad to have you as a fellow shareholder. Outside of unforeseen regulation or a complete collapse in the business, I can’t imagine we won’t do very well over the next 10-20 years.

    Best regards!

  150. DM,

    Have you read “Stocks For The Long Run” by Jeremy Siegel? In it he notes that Philip Morris was the best performer over something like a fifty year period when factoring total return which includes reinvested dividends, as I remember. It’s incredible that despite all of the headwinds that have faced the company, we are STILL talking about it as an opportunity.

    In fact, it is this constant fear of increased regulation/litigation that has caused PM to be habitually undervalued which has meant reinvested dividends were able to get in at bargain prices over decades.

    I don’t currently have a stake in PM. I have had the company on my radar for years and think if the price dipped/dividend was raised to sport a 6% yield or so, I would get rather tempted. At current levels, I am more likely to put my cash to work in a Canadian telecom (they tend to pay elevated dividends as well).

    Thanks for the interesting read and something to think about for 2015.

    – Ryan from GRB

  151. Ryan,

    Great point there. I actually referenced that book and the old PM’s results in a few comments above. Keep in mind, however, that the old Philip Morris and the one I’m discussing here are very different entities. But I still believe there’s an incredible long-term opportunity here. People keep doubting these companies and they keep delivering. I don’t know if that will always be the case, but I can’t see why it’ll stop over the next decade.

    Glad you found some value in it. And I hope the Canadian telecom investments work out fantastically for you. 🙂

    Best wishes.

  152. Jason, Do you think plain packaging legislation which is expected to be passed in the UK would affect tobacco companies adversely in the long term?

  153. Amit,

    It’s tough to say. From what I can see in Australia, cigarette volumes haven’t been impacted all that much. And PM’s market share is on the rise over there. From what PM’s reported, it’s caused trading down. So there are drawbacks there for sure, but it’s not as catastrophic as I thought it’d be. I guess we’ll see how it goes if it passes over there.

    Cheers!

  154. I agree completely. PM is one of two stocks I did not sell when I bought a house. The other being KO. As a side note — Kraft and PM used to be owned by MO, so people getting company stock for working for Kraft did well over the last few decades… Frugal living, hard work, and shrewd investing really helped my family succeed.

    I would buy more, if it wasn’t >50% of my current portfolio.

    Thanks,
    WE

  155. WE,

    I wish I could go back in time and buy the old Philip Morris, before it split into MO, PM, KRFT, and MDLZ. Of course, I wouldn’t mind a healthy chunk of Apple as well. Hindsight is unfortunately 20/20. 🙂

    Cheers!

  156. DM, I agree with PM. I will add to my existing position soon.
    I’ve recently started DGI investing and stumbled on your blog. I will start on my blog to share my ideas. Coincidently, PM appears on my screen with the highest yield. Div4son

  157. Thanks for writing. I read that plain packaging would prevent new companies from entering the market as they cant advertise anymore. Thus creating another impenetrable moat around the PM brands.

  158. DM, Is it wise for a Canadian to invest in PM or any other long term U.S investments considering our horrible exchange rate (approx $.80)? Or is it wiser to ficus on Canadian investments until the dollar gets closer to parity?

    Thanks!

  159. Div4son,

    Best of luck with the new blog. 🙂

    PM is definitely a long-term winner. I have no idea what the stock will do this year or in any other year, but I feel confident about the company’s prospects looking out over the next five to ten years. And I think the odds that they continue to pay and increase dividends is very, very high, which is ultimately what we’re after here.

    Thanks for stopping by.

    Cheers!

  160. Canadian,

    Exchange rates don’t really bother me. When the stock price takes a hit due to exchange rates, the yield goes up. That said, you may want to wait for a more advantageous time. Of course, that could take a while and you could be missing out on a potential opportunity – that goes for PM and all US stocks. It’s really a personal call.

    Take care!

  161. Amit,

    Right. That’s a benefit. I think the plain packaging is a net negative for the company, but I don’t necessarily believe it’s as negative as it’s made out to be. And that’s pretty surprising, as I thought it’d be disastrous. The data coming out of Australia isn’t catastrophic. What I’ve read mostly states that customers are trading down, indicating that the brand equity is damaged. But there are only so many players, and PM just needs to adapt to that. It’s certainly not great, but I don’t necessarily believe it’s damaging the company in the manner that some people predicted (including myself).

    Best regards!

  162. Curious to hear what you think about the Q1 results today? To me I see increasing debt to over 30.5 billion and constant currency FCF declining despite lower capex. I was considering opening a position in the coming weeks after earnings today & further research, but with the 8% jump and some of these core dividend metrics actually declining despite really good currency neutral revenue and market share increases… I’m second guessing.

  163. Dave,

    Well, if you weren’t real confident about PM before today, I’d think you’d be a lot less interested after that big pop. Nonetheless, I’m still very confident about their long-term prospects.

    The debt situation is really nothing new, though they’ll have to slow that significantly. All in all, I’m pretty impressed with the jump in revenue, market share, and volumes… even with the currency effects (which won’t persist forever). I’m not buying PM, as I’ve mentioned quite a bit. But it’s one of my favorite long-term plays available right now.

    Cheers!

  164. Thanks, I just didn’t want to rush on it and wanted to see how things looked after today. Need to look into their future prospects more and run some return scenarios. Was definitely liking the price though.

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