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Summary

  • PM is a compelling stock for investors seeking an alternative to bonds.
  • PM trades at a discount to market multiple with little payout or financial risk to dividend.
  • Despite volume challenges the non-cyclical industry poses little challenge to dividend sustainability.

Recently Citi Equity Research released an updated list of global bond refugee stocks. Stocks with higher dividends and lower volatility. Among companies making the cut is Philip Morris International (NYSE:PM) with a current dividend yield of 4.50%.

PM operates in a consumer non-cyclical industry making it a natural fit for the high dividend and low volatility list. PM has a market cap of $131 billion and a $157 billion EV.

Valuation

PM is attractively valued on an earnings basis with a trailing P/E of 15.8, a 10% discount to the S&P 500 (NYSEARCA:SPY) multiple of 17.6. PM earnings discount is expected to narrow as the shares trade at 14.8 times forward earnings versus a 15.4 times for the S&P 500.

PM's EV is 10.7 times trailing EBITDA, which is modestly higher than most competitors such as Reynolds American (NYSE:RAI) and Lorillard. (NYSE:LO)

Dividend Stability

PM's dividend is highly stable. The dividend has increased annually and more than doubled since the spin-off from Altria in 2008.

PM has a debt to EBITDA ratio of 1.88 making it unlikely debt levels will impede dividend growth in the future. PM is paying out 68% of trailing earnings and returning additional cash through share repurchases. There is little risk of dividend cut from earnings declines and more likely management would choose to rein in share repurchases before cutting dividends.

PM By the NumbersPMMarketPremium/Discount
Market Cap ($B)131.80NM
Enterprise Value ($B)157.32NM
Dividend Yield (%)4.501.99126.1%
Valuation Metrics
Trailing P/E15.8117.61-10.2%
Forward P/E14.8215.44-4.0%
EV/EBITDA10.70NM
Dividend Sustainability
Debt to EBITDA1.88NM
Payout Ratio68%
Price to Book ValueNegative
Source Yahoo Finance & Wall Street Journal

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Challenges Ahead

Reviewing PM's recent earnings presentation challenges remain with cigarette volumes and net revenues declining. Several of PM's key markets remain challenged along with government sponsored health initiatives and excise taxes potentially negatively impacting PM. The company noted consumers may substitute down market.

(click to enlarge)

Although challenges exist, PM's high yield, compelling valuation, and non-cyclical industry make it a leading bond refugee. PM has little financial risk to a dividend cut from either a payout ratio or indebtedness.

Source: Bond Refugee Stocks - High Yields And Low Volatility Part I: Philip Morris International