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Summary

  • Constant currency revenue increased 4.5% for the quarter.
  • Philip Morris acquired U.K. e-vapor business to further strengthen the company's e-vapor position.
  • The company gained market share in the EU region.
  • Tax increases in Japan negatively affected the company's operations in that region.
  • Philip Morris saw strong growth in Latin America, North America (excluding US), and the company's EEMA region.

Philip Morris (NYSE:PM) is the largest publicly traded cigarette company in the world based on its market capitalization of about $133 billion. The company sells Marlboro, Parliament, Virginia Slims, and other cigarette brands internationally. Philip Morris does not sell any products in the United States; Philip Morris' parent company Altria (NYSE:MO) sells the same brands in the United States that Philip Morris sells internationally.

Philip Morris $7.8 billion 2nd quarter 2014 net revenues came from the following regions:

European Union (NYSEARCA:EU)

31%

Eastern Europe, Middle East, & Africa (NASDAQ:EEMA)

29%

Asia

30%

Latin America & Canada (LA&C)

10%

Source: Philip Morris 2nd Quarter 2014 Results

Second Quarter Results

Philip Morris posted strong results for the 2nd quarter of 2014. The company's currency adjusted revenue increased 4.5% versus the 2nd quarter of 2013. Constant currency earnings per share increased 20% versus the same period last year.

Philip Morris has been repurchasing its shares at a rapid clip. The company has repurchased about $11 billion worth of shares over the last 12 months, or around 8% of the company's market cap. Philip Morris repurchased $1 billion worth of shares in the 2nd quarter of 2014, which is less than 1% of the company's market capitalization.

Philip Morris invested in the growing e-vapor trend by purchasing 100% of U.K. based e-vapor company Nicocigs. Nicocigs principal brand is Nicolites; the company has 40 sales representatives which distribute Nicolites to over 20,000 points of sale in the U.K. The acquisition will be accretive to shareholders as it strengthens Philip Morris' position in the international e-vapor business.

Source: Philip Morris 2nd Quarter 2014 Results

2nd Quarter Growth by Region

The tobacco industry is slowly declining. As a result, Philip Morris must gain market share to grow revenues. The company grew market share in all of its major EU markets except Germany for the 2nd quarter of 2014.

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Source: Philip Morris 2nd Quarter 2014 Results

Philip Morris grew constant currency net revenues 13.7% in its EEMA region. The company increased Marlboro volume 3.6% in the region, and Parliament volume 6.5%. Overall cigarette volume was down for Philip Morris in the region, as consumers switched from low end cigarette brands to higher end brands. In addition to growing its brands, Philip Morris also pushed through favorable price increases in the regions, growing constant currency revenues in the double digits.

Asia results were disappointing for Philip Morris. Constant currency revenue decreased 3.6%. The primary cause was lackluster sales in Japan driven by a consumption tax hike. Total cigarette industry sales were down 14.4% in Japan for the quarter. Philip Morris saw volume drop 16.4% due to the tax increase and losing 0.5% percentage points of market share in Japan.

Second quarter constant currency revenues in Latin America and Canada grew 11.2% due to price increases. Volume actually decreased for the quarter, but increased prices still managed to grow revenue in the double digits. Philip Morris' market share increased in both Canada and Argentina for the quarter. The company's Mexico market share decreased slightly; Philip Morris still controls 71% of the Mexican cigarette market.

Philip Morris reaffirmed its guidance of 6% to 8% earnings per share growth for the full fiscal year 2014. Management stated that heavy price discounting in Australia and packaging cost increases make it likely that Philip Morris' earnings for 2014 will be near the low end of its guidance.

Source: Philip Morris 2nd Quarter 2014 Results

5 Buy Rules of Dividend Investing

Philip Morris 2nd quarter results show a business that continues to grow despite declines in its overall industry. How does Philip Morris compare to other publicly traded businesses with a long history of dividend increases?

Philip Morris will be compared to the 126 businesses other businesses with 25+ years of dividend payments without a reduction on the 5 Buy Rules from the 8 Rules of Dividend Investing. The 8 Rules of dividend investing rank businesses with a long history of dividend payments over several financial metrics to give an unbiased view of how the company compares to its peers.

Consecutive Years of Dividend Increases

Philip Morris has increased its dividend payment each year since its spin-off from parent company Altria. If you count the company's dividend history with Altria, Philip Morris has paid increasing dividends for 39 consecutive years. The company's ability to grow profitably through the decline of the cigarette industry shows how much pricing and brand power the company commands.

Why it matters: The Dividend Aristocrats (stocks with 25-plus years of rising dividends) have outperformed the S&P 500 over the last 10 years by 2.88 percentage points per year.
Source: S&P 500 Dividend Aristocrats Factsheet, February 28 2014, page 2

Dividend Yield

Philip Morris has a dividend yield of 4.44%, the 7th highest out of 127 businesses with 25+ years of dividend payments without a reduction. The company's high dividend yield coupled with expected earnings per share growth of 6% to 8% this year gives shareholders of Philip Morris an expected return of over 10% to 14% for fiscal 2014.

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Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013.
Source: Dividends: A Review of Historical Returns

Payout Ratio

Philip Morris has a payout ratio of 73.09%, the 107th lowest out of 127 long-term dividend businesses. The company's high payout ratio means Philip Morris will not be able to increase dividends faster than overall company growth for the foreseeable future.

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Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006.
Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3

Long-Term Growth Rate

Philip Morris has managed to grow revenue per share at 8.63% since its spin-off from Altria, the 13th highest growth rate out of 127 businesses. It is remarkable that Philip Morris has managed to grow revenues quicker than most other long-term dividend businesses despite being in a declining industry.

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Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013.
Source: Rising Dividends Fund, Oppenheimer, page 4

Long-Term Volatility

Philip Morris has a standard deviation of 24%, the 40th lowest standard deviation out of 127 businesses with a long history of dividends. The company's standard deviation is lower than average, but not exceptionally low.

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Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011.
Source: Low & Slow Could Win the Race, page 3

Conclusion

Philip Morris is a buy and a Top 10 stock based on the 5 Buy Rules from the 8 Rules of Dividend Investing. The company compares favorably to its peers based on both growth rate and dividend yield. Further, Philip Morris is a bargain compared to the generally overvalued stock market at this time. The company has a P/E ratio of about 16.5 which is significantly lower than the S&P 500's P/E ratio which is over 19.

Philip Morris has a long history of profitable growth, coupled with strong brands and extremely shareholder friendly management. Investors in Philip Morris will likely be rewarded with share buybacks, increased dividends, and overall company growth going forward.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.