Why Philip Morris Should Be In Your Portfolio

Feb.15.12 | About: Philip Morris (PM)

Shares of cigarette maker Philip Morris (NYSE:PM) hit another 52 week high on Monday, thanks to a decent earnings report last week and fresh optimism in markets around the globe. While I might not get in at these prices necessarily, a pullback would provide a better entry point, this stock needs to be in your portfolio. Here's why.

The Earnings Report:

Last week, Philip Morris reported its fourth quarter and full year results. The company reported revenues of $7.7 billion, which beat expectations by more than $300 million. Earnings per share of $1.08 missed by a penny, but when adjusting for one-time items, the $1.10 mark was a penny ahead.

Also encouraging were comments from CEO Louis Camilleri, who stated that there was strong volume growth in Asia. Additionally, pricing is seen as a tailwind in 2012, with the company already initiating price hikes in Germany, Russia, and Indonesia.

The company also issued earnings per share guidance in a range of $5.25 to $5.35, which was a bit higher than the $5.18 that was expected by the street. Currency issues may hit them by a dime per share, but it seems that dime is included in their above forecast. It looks like it will be a strong year for the company. Analysts have already increased their 2012 EPS estimate average from $5.18 to $5.25, and 2013 numbers from $5.73 to $5.84.

Dividend and Buyback:

After the company was spun off in early 2008, it began paying a $0.46 per share quarterly dividend, which after one quarter, was raised to $0.54. The company has increased the dividend each year since then, with the raise in 2011 going from $0.64 to $0.77 per quarter. At $3.08 per year, the stock yields almost 4%, and it was yielding more than that when it traded down to the $73 level last month. I encouraged investors then to take advantage of the stock's selloff, and through discussions I had with some traders and investors, a fair amount did. Those that got in then are up more than 10% already.

Now a 4% dividend is a great reason to buy a stock, and if the name just had the dividend, it would still be worth buying. But Philip Morris gives you even more reasons to buy. They are buying back their shares, and in large quantities.

Philip Morris began repurchasing its shares after the spinoff in 2008. Since then, they have bought back 414 million shares, at an average cost of $51.57. That's more than $21 billion worth of shares, nearly 20% of the outstanding shares count at the time of spinoff.

In 2011, the company spent $5.4 billion dollars to buy back over 80 million shares of its common stock. They spent over a billion in the fourth quarter. On their current three year plan, they've bought back more than $8.35 billion worth of shares.

The buybacks will keep coming. That three year plan above I mentioned was a $12 billion dollar plan initially, which leaves under $4 billion to be bought back. However, the company announced in its earnings report that it intends to buy back $6 billion alone in 2012. That means a new buyback program is coming, and rather soon. $6 billion worth of shares is more than 4% of the current market cap. So you are getting a near 4% dividend and the company is buying back $6 billion in 2012, and that doesn't include any dividend raises.

There still is growth in the company:

Some investors believe that high dividend, high buyback names offer no growth. That's not the case usually. Philip Morris is still expected to grow revenues by two percent in 2012, with that number accelerating to more than five percent in 2013. Earnings per share are currently forecasted to rise from $4.88 in 2011, to $5.25 in 2012, and $5.84 in 2013. While a lot of that is due to them buying back shares, it's better than earnings per share falling, isn't it? I say yes.

The Best of Its Industry:

The cigarette industry is doing quite well, as we've seen in the past week. Two great earnings reports, one from Philip Morris, and one from Lorillard (NYSE:LO). I'd also buy Philip Morris before buying Altria (NYSE:MO).

What makes Philip Morris so great? I'll give you three numbers.

Key Statistics PM MO LO
2012 Revenue Growth 2.0% 3.9% -29.8%
2013 Revenue Growth 5.5% 1.6% -1.0%
PEG (5-year) 1.23 1.66 1.23
Click to enlarge

Philip Morris has more growth potential than Altria and Lorillard. Also, Lorillard just had a huge rally after its earnings report, which makes shares seem a bit expensive currently. Philip Morris doesn't offer the same size dividend yet, but it is getting there. I expect a dividend raise in 2012 from Philip Morris, and that will make it closer in line with other cigarette makers.

Getting into Philip Morris:

I would suggest waiting for a pull back, as the name is now at 52-week highs. Last time the stock ran up to $80, it pulled back to $73 after some analyst downgrades. I'm not sure it is going to drop back to that level anytime soon, unless we get a market crash or some other unforeseen event. My recommendation is to start entering in the $78 or $79 range, and try to accumulate as it goes lower. Remember, at $77, the stock yields 4%. You can use that as your focus point.

But this name needs to be in your portfolio if you are a long term investor, a value investor, or even a growth investor. The company offers a very good dividend, is buying back plenty of stock, and does offer some revenue and earnings per share growth. It is an investor favorite and I don't see that changing anytime soon. But please, don't overpay for it. Get in at a reasonable level.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.