As many income investors know, dividend investing can result in the guarantee of income or in certain cases where the investor has a dividend reinvestment account, more shares. I personally prefer the latter, but that's just me. In this article I wanted to focus on one of the higher-yielding companies within the tobacco sector and note several industry-based comparatives moving forward.
There's currently no doubt in my mind that Philip Morris International Inc. (PM) is the world's leading tobacco company since it produces more than half of the world's top international tobacco brands, including such names as Marlboro, Cambridge and Chesterfield that sold in approximately 185 countries worldwide. The company currently has a dividend yield of 3.90% and annualized dividend of $3.40 per share as well as a P/E ratio of 17.74, making the stock quite inexpensive at present levels.
One the most important variables aside from the company's yield is the continued revenue growth of 38% Philip Morris has demonstrated over the past five years. According to Ahmed Ishtiaq, of EFS Investment, the revenue growth of Philip Morris "represents an exceptional growth in revenues for a company operating in a mature and stable industry. Moreover, the firm has been able to generate an impressive operating margin of between 16% and 17.6% in the previous five years. An increasing trend in revenues and operating margin is backed by an incredible increase in the EPS from the levels of 2007. Philip Morris earnings per share have experienced a massive increase of 69.5% in the previous five years. For the most recent quarter, the company reported earnings of $1.38 per share and year-over-year growth of 8.1%".
Total Cash Comparatives
Philip Morris International faces some its toughest competition from such names as Altria Group (MO), Lorillard, Inc. (LO), and Reynolds American, Inc. (RAI), all of which should be considered high-yielding and fairly inexpensive given the amount of cash each company is currently sitting on.
Total Cash (mrq)
The good thing about this chart is the fact that not only does Philip Morris lead the group in terms of Total Cash, but the $4.82 billion could hint at the possibility of another dividend increase or possible acquisition, though no candidates have been named. Although the company recently increased its current dividend from $0.77/share to $0.85/share back in September, I wouldn't get too excited about the cash being for a special dividend since Philip Morris has raised its regular quarterly dividend by 89.10% since June 2008.
Earnings History Comparatives
In the last 12 months each of the four companies in focus have demonstrated pretty flat earnings, and although they aren't the average EPS beats most investors would jump on, they are still pretty solid. Philip Morris, Altria, and Reynolds American have all managed to surpass estimates by 1.675%, 1.375%, and 1.02%, respectively. The only exception came in the case of Lorillard which had managed to demonstrate the only negative number in the group, -2.10%, as the company has missed estimates in the last three of its four quarters.
One of the driving forces behind the overall profit growth of the industry as of late actually comes in the form of a tax loophole. According Liz Szabo of USA Today, "due new types of tax loopholes, "little cigars" that look nearly identical to cigarettes, except for their brown color, are taxed at much lower rates, so they cost a fraction of what a pack of cigarettes does ($1.40/pack vs. $4.50/pack). Given such types of loopholes, many of the companies within the industry could experience stronger than expected growth over the next few years if those loopholes are taken advantage of.
One of the most important contributions to a company's revenue and future earnings are the company's current inventories. According to its definition featured on Investopedia.com, "inventory represents one of the most important assets that most businesses possess, because the turnover of inventory represents one of the primary sources of revenue generation and subsequent net income for the company's shareholders as well as its owners". By taking a look at the current inventories of Philip Morris (as the leader of the pack) and its industry-based counterparts we can get a very good idea of how the company could once again outperform the sector.
For potential investors looking to establish a position in Philip Morris, I'd continue to take a closer look at the company's fundamental performance and keep a watchful eye out for such things as an improvement in earnings growth or an increase in the company's dividend. If potential investors are looking to scoop up shares based on value, I'd do so with a medium to moderate position and add to that position as dividends and earnings are announced.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.