There is an investor favorite out there that probably can't wait for 2013 to be over. This name, loved by investors for its juicy dividend yield and strong buyback program, has been one of the most disappointing stocks in 2013. As you can guess from the title, I'm talking about cigarette giant Philip Morris (PM). Today, I'll take a quick look at the year that wasn't for Philip Morris, and preview what hopes to be a rebound in 2014.
A look back at 2013:
If you had told me, or the investors of Philip Morris, that the stock would be a laggard in 2013, you probably would have been called crazy. Philip Morris actually got off to a good start this year, with the stock just missing a share price in the triple digits by a little over three dollars. Unfortunately, as you can see from the chart below (chart actually covers an entire year), Philip Morris stock turned during the latter part of Spring, and shares have been pressured ever since. In this race, Lorillard (LO) was the clear winner. Not even Altria (MO) or Reynolds American (RAI) were able to beat the S&P 500 (SPY), but they all were able to trounce Philip Morris.
(Source: Yahoo! Finance)
On December 19th, 2012, Philip Morris closed at $84.65, less than a dollar from where the stock trades now (Yahoo! dividend adjustment is $81.32). What did in this cigarette giant? Well, an initial hit was delivered when interest rates started to rise. High yielding stocks, of which Philip Morris is one, were definitely hurt. As fixed income rates move higher, it means names like Philip Morris are less attractive. Additionally, Philip Morris having a huge debt pile and needing to add debt for its dividend/buyback, would be forced to pay higher rates. But the main culprit this year was that results just were not great. Here are my three earnings wrap-ups for Philip Morris in 2013:
- Q1 report - Philip Morris Pulls Back On Currency, Debt Worries - While revenues beat expectations, earnings per share numbers missed by a wide margin thanks to currency troubles, and the company lowered its full year EPS forecast.
- Q2 report - Philip Morris: Bad Quarter, Good Stock - Company missed on both a revenue and earnings per share front. Yearly forecast lowered again thanks to currency problems.
- Q3 report - Philip Morris: Mixed Quarter Not Good Enough - Revenues missed slightly, and earnings per share either beat by a penny or were in-line, depending on who you asked.
In the end, it all came down to results, which were not great. Philip Morris was plagued by currency issues on the bottom line, but it all started with the top. Cigarette shipment volumes were light, so the company wasn't able to produce the revenues many were hoping for. For those that read my articles, you know that I include a comparison table of growth estimates for the cigarette names included in this article. Here's how estimates looked late in 2012, with the yellow highlight indicating the leader in that category. I also used to cover British American Tobacco (BTI), but do not anymore.
(Table from the last week of 2012)
Going into 2013, Philip Morris was expected to show the most revenue and earnings growth of these five names in 2013. Obviously, that did not happen as you know by now. But the degree to which results disappointed may surprise you. Here is what estimates looked like just two weeks ago, and they haven't changed since.
(Table from early December 2013)
Not only did Philip Morris not lead in terms of revenue and earnings growth, but there is a chance that Philip Morris could come in last of these four names. Earnings per share growth is projected to be last, and Philip Morris is in a tight race against Reynolds in terms of revenues. But the good news is that 2013 is nearly over, and 2014 is about to start. However, is that really a good thing for Philip Morris? Let's discuss the future of Philip Morris in the next few sections.
Growth expectations now in line:
Philip Morris shares have dropped again in the past month thanks to the company's warning for 2014, which I detailed in my latest Philip Morris article. The last table above is from that article, as I mentioned that there have not been any changes to analyst forecasts for the four names discussed.
Philip Morris shares have lost about $6 since the warning and subsequent Goldman Sachs downgrade. That has helped to get expectations a little more in line with valuation, in my opinion. As I discussed in the article above, Philip Morris shares are no longer trading at the huge premium that they used to be. Obviously, Philip Morris doesn't lead the pack in growth any more, so it is quite reasonable for the valuation to come down.
So why invest in Philip Morris during 2014?
Perhaps the best reason to own Philip Morris is the dividend. The $3.76 annual payment yields 4.40% annually as of Thursday's close. This is a company that has rewarded investors since its spinoff from Altria. The chart below shows how the dividend has gone higher and higher. The years represent the majority payment, so for example 2014 represents the $0.94 payment that will be received three times in 2014. You can still get in on the next payment, but not for much longer.
The dividend alone is one excellent reason to buy, but there's another that makes this stock even more attractive. Philip Morris is in the middle of a 3 year, $18 billion buyback plan, which is mostly executed evenly each quarter. That means that $6 billion worth of shares should be bought back during 2014. Although the company has poured on billions in debt for this buyback thanks to depressed cash flows, it makes sense in this low-rate environment. However, investors should realize that the buyback rate will probably slow down when the current plan ends. I'm targeting $4 billion or so a year for the next plan when the current one finishes up, scheduled for 2015. The buyback has done an excellent job of reducing the company's share count, which in turn means a higher dividend payout. It would not surprise me if the dividend gets to about $5.00 a share three years from now.
The final reason to invest in Philip Morris during 2014 is because the company is using 2014 as an investment year. New products such as e-cigarettes will be rolled out, and the company expects its growth to return to normal levels in 2015. Since the market is forward looking, you would hope that the stock would start to rise once revenues and earnings start to rebound. Additionally, with expectations really low, there is the potential for the company to beat going forward.
Philip Morris was a tremendous laggard in 2013 as the company was derailed by revenue and currency troubles. The company will use 2014 as an investment year to set up new products for the future, including e-cigarettes. Growth expectations have come down with the stock, so the valuation is fairly reasonable. I've been pitching that investors should look at this name at a 4.50% annual yield, and the stock is almost there. 2014 might not be the best year for Philip Morris, but it should be better than 2013. Investors are being paid to wait with a nearly $4 annual dividend payout and billions in stock buybacks. Should the company beat expectations in 2014, this stock could offer decent upside as well.
Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.