Philip Morris International (PM) is the largest publicly
traded manufacturer and marketer of tobacco products. In 2008 it spun off from
Altria and got it’s own stock notation. PM produces and distributes well known
brands like Marlboro, L&M, Chesterfield and Philip Morris. Markets are
global and diverse; it sells almost everywhere except the USA. The USA-market
is controlled by Altria. This provides a big advantage for PM as the tobacco
market in USA is slowly declining, whereas there are more opportunities for new
markets worldwide.
Dividend policy
PM is not a dividend challenger, contender or champion as
defined by David Fish (see
here)
but this is only because it started in 2008. Since 2008 dividend has grown 13%
compounded per year. Payout ratio was 62% in 2012 which is reasonable. It also
has a share buy-back program. Until the end of 2012 PM spent $27.9 billion to
repurchase shares (about 23.2% of shares outstanding). For the next 3 years a
new program has begun (about $18 billion) to repurchase shares and this roughly
equates to another 12% of the shares outstanding (based on $90 per share on a
float of 1.63B). To finalize this section; the current yield is 3.90% which is lower
than the 5-year average yield of 4.40%.
Risks
Obviously there are risks with a stock like PM. Government
policies can and will be stricter in the future. Think of non-smoking areas in
bars, public places, etc, but also the new packages in some countries. New products
like e-cigarettes could provide new markets to companies like PM. But there are
at least two arguments why cigarettes are here to stay: 1) it’s addicting
properties makes sure people are coming back and 2) governments “earn” a lot of
money through taxes and duties. A lot has to happen for both people and
governments to quit smoking or prohibit it at all.
Valuation
In this section I’ll use a few methods to value PM.
Average PE-valuation
of current year
Current PE-ratio is around 16.8x. At the 52-week low price
it was 15.8x and at the 52-week high price it was 18.6x. The average price of both
numbers lead to $90.
Average PE-valuation
of last 5 year
Current PE-ratio is around 16.8x. Historical 5-year PE-ratio
is 15.5x which gives a valuation of $80.
Average yield of last
5 year
Current yield is 3.9%. Historical 5-year yield is 4.4% which
gives a valuation of $80.
Discounted Cash Flow-valuation
Using the following assumptions I arrive at a fair price of
about $104.
- Dividend growth rate of 12% per year for 5
years, and a perpetual DGR of 5% thereafter.
- Earnings growth of 11% for the next 5 years
(source: Yahoo Finance) and 6% perpetual growth thereafter.
- Discount rate of 10%.
The average price valuation of these 4 methods is $88-89 so
it seems at the current price of $87.5 PM is fairly valued.
Conclusion
PM is a so-called sin-stock. From the perspective of a
share-holder however, it certainly is not! It’s dividend policy is share-holder
friendly and it’s a relatively stable business. People keep smoking, whether
times are good or bad. This week I bought a block of shares PM at $87.5 with a
yield of 3.90%. This purchase adds almost $60 to my forward yearly dividend which
stands at $163 after this purchase.
