Philip Morris (NYSE:PM) already made it into my 'regular' income portfolio, but the tobacco company would also be a good investment for the $100,000 high-yield income portfolio, HYIP, that I started in February. The reason: Philip Morris had an excellent first quarter that makes appetite for more. If Philip Morris's cash flow yield increases to 5% -- a key investment requirement for the high-yield income portfolio -- the tobacco company has a good shot of being included in that portfolio.
But first things first. Philip Morris is off to a good start to the year with strong first quarter results that beat consensus estimates by a wide margin.
In the first quarter of 2015, Philip Morris said it had net revenues excluding excise taxes of $6.62 billion, down 4.4% year-over-year. PMI's net revenues in the European Union were down 6.0% in the first quarter, in Eastern Europe/Middle East/Africa they were down 8.3% and in Asia 1.2%. Positive growth came from Latin America & Canada with 1.8% higher year-over-year net revenues. With revenues falling across most geographies, why would I think results were quite good?
Because on a forex-adjusted basis, PMI's net revenues actually increased 9.2% year-over-year. As we all know by now, the U.S. Dollar appreciated against most other major currencies in the first quarter, which negatively affected Philip Morris's first quarter revenue growth. However, currency effects say nothing about the performance of an international business. Adjusted for currency effects, Philip Morris did actually a pretty solid job. The tobacco company also beat the consensus revenue estimate of $6.13 billion.
Positive pricing across regions and a net increase in cigarette shipment volumes helped Philip Morris in the first quarter and contributed to Philip Morris's taking on an optimistic outlook for 2015 by raising its earnings guidance.
In the first quarter, PMI saw a 1.4% year-over-year net increase in cigarette shipments across geographies to 198.8 billion units.
Source: Philip Morris First Quarter Earnings Release
Net earnings attributable to PMI fell 4.3% year-over-year from $1.88 billion, $1.18 per diluted share, in 1Q 2014 to $1.80 billion, $1.16 per diluted share, in 1Q 2015. Philip Morris reported an adjusted diluted EPS of $1.16 compared against $1.19 in the year ago quarter. The Street was expecting earnings of $1.01 per share. Excluding currency effects, Philip Morris's adjusted earnings per share actually increased 23.5% year-over-year from $1.19 last year to $1.47 per share.
Increased outlook supports dividend growth story
The momentum Philip Morris and other tobacco companies experienced in the first quarter in terms of pricing tailwinds and improved shipping volumes is surely welcomed by investors who see rising dividends on the horizon. Philip Morris fueled those expectations when it increased its 2015 earnings guidance.
In February 2015, Philip Morris guided for earnings per share of $4.27-4.37. In its first quarter 2015 earnings release, Philip Morris said it now projects an EPS range of $4.32-4.42.
Surprisingly strong first quarter revenues on a FX-corrected basis, adjusted earnings and a raised profit outlook were met with excitement: Investors sent Philip Morris's shares up more than 8% on April 16, 2015. New highs may be just around the corner for PM's shares if Philip Morris continues to report first quarter-like results throughout the year.
Source: StockCharts.com
An investment in Philip Morris makes sense for two reasons: Most obviously, a key reason to own the tobacco company is the low-risk dividend. Philip Morris pays shareholders $1.00 a quarter per share, for a 4.83% dividend yield. Since Philip Morris has regularly grown its dividend in the past, continued dividend growth is an almost certainty. In fact, a 5% yield could be within the realms of possibility.
Yet another reason to own Philip Morris is because the stock retains potential for capital growth. I estimate Philip Morris to have an intrinsic value of approximately $102 per share, which implies 23% upside based on Friday's closing price of $82.75.
Your Takeaway
The market welcomed Philip Morris's first quarter results by sending shares through the roof. The tobacco company is an attractive income vehicle despite the increased share price after the first quarter earnings release: First, Philip Morris fetches a price well below my estimated intrinsic value, $102 per share, and secondly, PM's dividend yield approaching 5% is nothing to scoff at either. Job well done Philip Morris. Long PMI.
