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Philip Morris' (NYSE:PM) common shares have been somewhat correcting over the last five month and investors might want to take advantage of what I believe are very attractive prices for long-term oriented shareholders.

Shareholders of tobacco companies have done well over the last five years even though companies in the tobacco industry suffer from a negative image and a stagnant or even declining revenue base in some markets. Strong anti-tobacco regulation in a majority of Western countries has consistently challenged cigarette companies. Nonetheless, their distribution record is outstanding. Companies in the tobacco industry seem to be particularly eager to repurchase shares and return cash back to shareholders in form of an ever increasing stream of dividends. Consequently, shares of tobacco companies are highly sought after and are often part of income-driven portfolios.

Philip Morris' shares have marked a five-year High on April 8, 2013 at $96.44. Shares have corrected about 11% since then and I think current price levels make a long-term investment very attractive.

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The performance comparison chart below reveals that the tobacco industry has done well over the last two years.

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Compared to other peer firms in the sector, Philip Morris has fallen behind: It has the worst one- and two-year and the second-worst five -year performance record. Lorillard (NYSE:LO) is the best performing company over all three measurement periods.

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Dividend discount model

A dividend discount model is an appropriate model to value Philip Morris due to its high payout ratio and long track record of paying cash to shareholders. I estimate that Philip Morris achieves a full-year 2014 dividend of $3.94 per share. With capital costs of 9% and a terminal growth rate of 5%, the intrinsic value of Philip Morris based on the dividend discount model is $104.42. At a current price of $86.29 per share the tobacco firm has about 21% upside potential.

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Market valuation

Philip Morris currently fetches an earnings multiple of 14.95 which is largely in line with other international, large-cap tobacco companies. Altria (NYSE:MO) trades at 14.43 and Reynolds American (NYSE:RAI) at 14.78. The peer group average P/E for the tobacco companies stands at 14.61.

(click to enlarge)Philip Morris pays a dividend of $0.94 per quarter. The annualized dividend now stands at $3.76 and the forward dividend yield at 4.36%. Philip Morris has a great long-time record in increasing distributions: Annualized distributions have more than doubled since Q2 2008. Only Altria and Reynolds American surpass Philip Morris' yield with 5.17% and 4.96% respectively. British American Tobacco (NYSEMKT:BTI) has the lowest dividend yield of the peer group with 2.73%.

(click to enlarge)A summary regarding P/E, P/S and D/P ratios for the five major tobacco players is provided below.

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Conclusion

The pullback in share price allows investors to buy a dividend champion at a discounted price. Investors who purchase at a share price of $86.29 get a 4.36% forward dividend yield. Shares also have 21% upside potential to the estimated intrinsic value of $104.42 indicated by the dividend discount model outlined above.

Philip Morris' commitment to shareholder remuneration (high dividend growth rates, share buybacks, high payout ratio) is outstanding. Its high initial free cash flow yield is another reason why investors should think about adding this tobacco company with a proven distribution record to their portfolios. Dips and temporary market disruptions might offer additional opportunity to snatch this dividend machine up on the cheap. Strong Buy for investors with a desire to achieve regular income and with a long time horizon.

Source: This Tobacco Company Has Outstanding Dividend Value And 21% Upside Potential