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Checking In With Philip Morris International (PM)

22 April 2010 4 Comments

PM Earnings

Philip Morris International, Inc. (PM) reported earnings and scored a “miss” according to most analysts.  I typically could care less about whether it was a “beat” or “miss” so that’s all I’m going to say about that.  The bottom line is that PM has reiterated that it is on track to achieve earnings growth of at least 10% and bring in EPS of $3.75 to $3.85 for 2010.  Based on 2010 EPS of $3.75, a $50 stock price means a price-to-earnings ratio of 13.3.

Share Buyback Update

PM has nearly completed its $13 billion share buyback program that began in May 2008.  Since then, the company has spent $12.7 billion and will have the full $13 billion complete by the end of April.

Moving forward, PM has already announced a new $12 billion buyback to begin in May 2010 and take three years to complete.  Again, assuming an average $50 share purchase price, this would equate to buying back 240 million outstanding shares.

Future Value

Ballparking outstanding shares to be 1.879 billion shares and assuming $3.75 EPS, we can ballpark 2010 earnings to be $7.05 billion.  If we project out a 10% earnings growth over the next three years, in 2013, we can estimate $9.38 billion in earnings.  If we then remove the 240 million shares that will be bought back, we can adjust our outstanding shares to be 1.639 billion shares.  The resulting 2013 EPS then would be $5.72.  Taking today’s P/E of 13.3, this would result in a share price of $76.08 (a 52% increase from $50/share).  If we assume a more conservative P/E of 10, we could estimate a share price of $57.20 (a 14.4% increase from $50/share).

Additionally, we’re not factoring in dividend yield into the above rough calculation.

Dividends

PM has an excellent history of increasing its dividend payout (going back to Altria management).  Currently, the dividend is $2.32 or $.58 quarterly.  This is an increase from $2.16 or $.54 quarterly last year (a 7.4% increase).  Based on a share price of $50, the dividend represents a 4.64% yield.

Because of the steady income from dividends that PM represents, a DRIP plan is an excellent method of investing and accumulating PM shares that I’d encourage you to consider.

Risks

  1. There is definite risk in the tobacco business as governments regulate and tax the sale of cigarettes in countries around the world.  With that said, there are still markets that represent significant growth for PM.
  2. The currency risk is very real for PM since they do their business outside the United States.  When the dollar is stronger, their profits take a hit; when the dollar is weaker, their profits will expand.  If the market corrects, and there is a “flight to safety” to the dollar, the dollar will rise, and PM’s share price will be affected.
  3. There is a risk in my opinion of a general broad market correction.  If this happens, PM will definitely take a hit as well (see the below chart).  Although, a nice dividend paying stock is definitely better to own in a bear market versus a non-dividend paying stock since the income can provide a cushion to the downward trend in stocks.

Charts

The following one year chart shows that PM has tracked pretty much alongside the S&P index.  As such, if the broad market corrects, you can indeed expect PM to move lower as well.

PM one year chart

The following two year chart shows that PM not only did not fall as much as the S&P during the “crash” but it also has outperformed the entire two year period when compared to the S&P.  Remember, both charts don’t factor in dividend return either.

PM 2 Year Chart

My Position

I recently sold most of my PM position when I was called on my covered call position and forced to unload my shares.  Since then, I’ve sold puts with a $46 strike price for two reasons.  First for the premium income I receive from selling the puts, and second, because I’m very comfortable buying PM at a $46 price if forced to.

The bottom line is that I like this company a great deal and love it as a core dividend holding.  Because of my views on the overall market, I’m confident that there will be nice buying opportunities in the future.  Until then, I’m content to sell some puts and earn a premium that is actually more than the dividend yield I would be earning by holding the shares.

This by no means represents any professional financial analysis or advice.  Do your own research on stocks and other financial decisions that you might make.

4 Comments »

  • Matt said:

    Agree fully. I believe earnings will increase by more than 10% per year. Im hoping 15% per year which I think is realistic with the global economy recovering and people trading up to Marlboros premium brand.

    After the share buyback I would like to see a couple larger dividend increases which should easily attained after buying back so many shares.

    Excellent company, my largest holding outside of MGM and MO. Cant go wrong with vice stocks.

  • Andy said:

    It is a very good stock to own.

  • Felix Amadi said:

    This is no doubt a promising stock for anyone interested in the stock business.
    The points are well stated as regards the risks of the business, but I encourage others like to buy into it and off-cause, expect returns.