Philip Morris (NYSE:PM) announced positive results today. The company reported diluted EPS of $1.44, thus exceeding the expectations by $0.01, which is comforting to its investors as the company had missed analysts' expectations in 3 out of the 4 last quarters. Moreover, the unfavorable currency reduced the earnings by $0.09. Therefore, as the currency effects tend to neutralize over a long period, investors should be even more pleased with Q3 earnings.
The negative side of the report was the reduced volume. Although the reported revenue was about the same as last year's revenue, the cigarette volume plunged by 5.7%. The company utilized its strong pricing power and outweighed the reduced volume with higher selling prices, thus maintaining its revenue. However, investors should keep in mind that the company cannot keep raising its prices for long because it would lead its customers to other brands or cheaper options, such as tax-free (illegal) cigarettes. Therefore, at some point in the near future the reduced volumes will inevitably result in lower revenue.
Another negative aspect was the inefficiency of the management in the execution of the share repurchases. The company maintained its past annual rate of 4-5% buybacks and repurchased 16.7 million shares for $1.5 billion, which implies an average price of $89.8. If one checks out the chart of the stock, one realizes that the stock ranged from $83 to $91 and exceeded $90 only in 4 days during Q3! Therefore, the company should improve its buyback system and possibly imitate Exxon Mobile (NYSE:XOM), which purchases a standard number of shares every day.
Overall, the results were positive, as the company managed to significantly increase its net income despite the well-known headwinds of the smoking industry (heavy taxes and repelling packages) that reduced its volumes. Nevertheless, as consumers are increasingly pressured by high prices, the worries remain whether the company will maintain its strong pricing power in the future. In addition, investors should keep in mind that Philip Morris has already reached a dividend payout ratio of almost 70%, which means that it will be hard to keep growing its dividend by 10% every year.