Friday, January 24, 2014

Stock Analysis of PMI

Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. The company has paid and consistently increased dividends every year since being spun-off from Altria Group (MO) in 2008. The last dividend increase was in September 2013, when the Board of Directors approved a 10.60% dividend increase in the quarterly distribution to 94 cents/share.

The company’s largest competitors include British American Tobacco (BTI), Imperial Tobacco (ITYBY) and Japan Tobacco.

Earnings per share have doubled over the preceding 7 years to $5.17 in 2012. The company expects earnings to reach $5.37-$5.42/share in 2013, followed by a 6-8% increase in 2014. Despite the near-term slowdown in earnings per share, the company is committed to growing currency neutral EPS by 10-12%/year after 2015.


The company spends a large portion of cash flow on stock buybacks. Between 2008 and 2013, the number of shares outstanding has decreased from 2.116 billion to 1.614 billion. When a company buys out one out of four shareholders at attractive prices, this makes remaining shares more valuable as each stock certificate has a higher share of the total earnings pie.

PMI has a strong moat, because it would be extremely difficult for a new company to start and compete against the long established brands like Marlboro. Consumers generally stay with the brands they are used to buying. Cigarettes are an addictive product, which spots very good pricing power. In addition, PMI has the economies of scale which ensure that its costs stay low relative to the competition.

The plain packaging in Australia was a blow to the tobacco industry. The risk is that other governments could follow suit. The problem with plain packaging is that it could essentially destroy brands. Strong brands grow dividends, because they are sought after by consumers, and provide companies with solid pricing power.

The company has managed to more than double quarterly dividends since it was spun-off from Altria in 2008. Quarterly dividends increased from 46 cents/share in 2008 to 94 cents/share by the end of 2013.

The dividend payout ratio is at 60% for 2012, and based on expected earnings for 2013 I see it at approximately 65% for 2013.

The thing I really like about PMI is that it is able to grow earnings organically, while also paying generous rising dividends to shareholders and consistently buying back stock. I am a firm believer that the company offers something that every serious dividend growth investor craves – solid underlying fundamentals, strong competitive advantages and a wide moat, widely recognizable brands, growth in net income, shareholder friendly management, decreasing number of shares and most importantly a commitment to increasing dividends. As a result, it is no surprise that Philip Morris International is one of the largest holding in my dividend portfolio at the time of this writing.

Currently, the stock is attractively priced at 15.80 times earnings, and yields 4.40%. If I were starting my dividend investment journey today, PMI would be high on my list for purchasing.

I am going to end up this article with the following quote from Warren Buffett :"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."

Full Disclosure: Long PM, MO

Relevant Articles:

Six Notable Dividend Increases so far in September
Seven wide-moat dividends stocks to consider
Strong Brands Grow Dividends
My Dividend Portfolio Holdings
The Dividend Investment Journey

This article was written by Dividend Growth Investor. If you enjoyed this article, please subscribe to have future articles emailed to you [Email] or follow me on Twitter [Twitter].

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