By: Ahmed Ishtiaq
Philip Morris (NYSE:PM) has been one of the better performing companies over the past year, and the stock is up more than 10%. Solid dividends, generous payout and impressive growth in stock price have been a big pull for investors. The tobacco giant is one of the biggest companies in the world, and currently holds more than 15% of the global market share. Philip Morris's brand Marlboro is the best selling brand in the world. Some of the other brands by the company are L&M, Bond Street, Philip Morris, Chesterfield, and Parliament. Top local brands include Fortune, Morven Gold, and Dji Sam Soe. PMI's portfolio spans the price spectrum with premium, mid-priced, and value-priced products.
Philip Morris has been performing well despite the poor global economic conditions. However, there are some risks, which the company will face in the future along with the opportunities offered by the market. Let's take a look at the opportunities and threats faced by the company.
Philip Morris is one of the best dividend payers in the market, and the company has attracted a considerable number of investors due to attractive dividends. The company offers solid growth in dividends as well as price appreciation. At the moment, Philip Morris offers an annual dividend of $3.4 per share, yielding 3.95%. The company usually increases its dividend payments at the end of the second quarter. Over the past twelve months, the company has paid $5.32 billion in cash dividends and generated $7.68 billion in free cash flows. The payout ratio for the company based on free cash flows stands at almost 70%.
At the end of 2011, payout ratio for the company stood at 50%. Trailing twelve months operating cash flows have come down substantially for Philip Morris. As a result, free cash flows suffered and the payout ratio has jumped to 70%. Despite a high payout ratio, I believe the dividends of the company are safe, and payout ratio should come down once operating cash flows recover.
Opportunities and Threats in 2013
At the moment, U.S. tobacco market is showing sluggish growth. However, Philip Morris is achieving substantial growth from its international operations. Especially, Asia is playing a vital role in revenue growth. Asia is a massive market for tobacco and the region has some of most rapidly growing economies. Philip Morris has a huge consumer base in Asia, and the company is growing its market share in the region. Currently, Philip Morris holds about 30% of the total market share in Asian markets. Furthermore, global economy is on the road to recovery, albeit at a slow pace. Recovering economic conditions should further enhance revenue growth for the company. The company is also taking advantage from low cost labor in Asia, and decreasing its overall cost.
On the other hand, international operations expose the company to a number of threats. The biggest threat from international operations is foreign exchange risk. Currently, a stronger U.S. dollar will affect the consolidated revenues of the company. As a result, real revenue growth may be different from the reported growth. Tobacco industry faces tough regulatory environment at the moment. Although regulatory environment is still lax in most parts of Asia and Africa; the regulatory environment is getting extremely tough in North America, Europe and Australia. As a result, the company can face substantial restrictions, which can hamper its revenue growth.
Comparison with Peers
The company is trading at a discount based on P/E ratio compared to its peers. Furthermore, Philip Morris has shown better EPS growth and margins than its peers.
Philip Morris has shown an impressive growth in its earnings over the past three years. However, the biggest issue with Philip Morris valuation is that the price of the stock has been increasing at a faster pace than its earnings. As a result, the stock looks a little expensive at the moment. Nonetheless, I believe the company will achieve substantial growth to justify current price levels. In addition, solid growth in dividends and generous payout makes Philip Morris an attractive investment. The stock is ideal for investors looking at regular stream of cash flows and solid growth.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Business relationship disclosure: EfsInvestment is a team of analysts. This article was written by Ahmed Ishtiaq, one of our equity researchers. We did not receive compensation for this article (other than from Seeking Alpha), and we have no business relationship with any company whose stock is mentioned in this article.