Philip Morris (PM) outperformed all 30 stocks in the Dow Jones Industrial Average in 2011, rising 34%. Including dividends, total shareholder return was 40%.
Can the stock continue to deliver in 2012 after last year's strong performance? So far, this year, the stock has been a laggard. I'm a shareholder and like the stock despite the 2011 run.
First, Philip Morris started the year off with a bang.
It beat on earnings, revenue, and guidance. The company earned $1.10 (a penny beat) on better than expected revenue of $7.7 billion. Shipping volume was up, largely due to the strong Asian market (up 10.5%). The company guided higher 2012 earnings at $5.25 to $5.35, better than the consensus $5.19.
Second, and perhaps even most compelling, Philip Morris leads other consumer staples stocks when it comes to free cash generation. Philip Morris is the king of free cash flow as a percentage of net revenues. It tops all the other big consumer staples plays. Philip Morris turns 38% of its sales into free cash. Other staples plays are far less efficient: Pfizer (PFE) at 28%, Johnson & Johnson (JNJ), Altria (MO) and Coca-Cola (KO) at 14%.
This slide presented during the company's conference call is edifying:
Per their conference call:
We continue to transform a considerably higher proportion of our growing net revenues into free cash flow than our consumer products and tobacco industry peers.
Why so important?
With robust FCF/sales, Philip Morris has plenty of cash left for shareholders for buybacks or dividends. Shareholders can receive a huge portion of operating earnings without stifling the company's positive cash flow.
The premiere free cash flow gave shareholders bountiful returns in 2011. Last year, Philip Morris paid out $4.8 billion, or $2.82 a share in dividends and bought back $5.4 billion worth of stock at an average price of $67, a bargain considering the current $80 share price.
Free cash flow margins remain strong. The company plans to spend another $6 billion to repurchase stock in 2012. Moreover, based on growing earnings, Philip Morris is likely to raise the dividend later this year.
Philip Morris has the capacity to handsomely reward shareholders and remains a strong buy.
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Disclosure: I am long PM.