I recently initiated coverage of Philip Morris International (NYSE:PM) at $85.50 in fall of 2015. Why? Well I have always been intrigued by the yield. The dividend is solid and growing, and market weakness has knocked shares back from highs. As most of you who follow my work know, I believe at least 20-30% of your portfolio should be high yielding (above 4%). Of course, should the share price grow to lower the yield, it doesn't mean the names should be abandoned. There are many places for yield such as banks, mortgage real estate investment trusts, business development companies, telecoms, as well as oil and gas. Great yield can be found in these sectors, as well as others. That said, tobacco stocks continue to offer yield, and PM is one of my favorites. Of course I will reiterate as a public health professional, it's in everyone's best interest not to smoke, or use tobacco of any kind. However, I will always believe in free will, and if you choose to smoke, so be it. That said, people continue to smoke despite the many government attempts to intervene, and with the advent of new electronic cigarettes and related products, the revenues continue to roll in. Of course the company has just reported, so I want to check back in on the name.
Nothing in this quarter makes me change my recommendation. I recommend holding a core position that you add to on dips, and sell some when the stock gets ahead of itself a bit. But at $89.20, can you consider jumping in, or wait for a pull back? Of course to answer this question I want to take a look at a recent performance of the name as well as discuss future expectations. In its most recent quarter the company took in revenues that declined 11.2% year-over-year to $6.4 billion. That hurts, at face value. However, this company is one that is truly getting crushed from currency issues. Many domestic companies with exposure overseas are feeling the pinch. Thus, what I think is prudent is to control for this impact to get a since of the real changes in revenues from a company operating standpoint. If we exclude the unfavorable currency impact and look at revenues in constant dollars, we see a negative hit of $1.1 billion due to currency issues. So, controlling for this, revenues were up 4.0% year-over-year. That is excellent for a company facing extreme regulatory pressure and what one would think is a declining customer base. That said, cigarette shipment volume was down 2.4% year-over-year. Factoring in expenses, the company saw earnings of $0.81, down $0.22 from 2014's $1.03. However, the currency issue persists. If we back out the $0.18 negative impact and look at a constant dollar basis, earnings per share were down 4%.
These results suggest the company continues to deliver. The earnings per share decline stems in large part to growing expenses stemming from acquisitions. Still, the revenue growth, while not dramatic on an adjusted basis is promising. We do need to be mindful of potential headwinds, most of which are regulatory. Let's be clear, government regulation is the greatest opposition to this company's growth. I want that to be evident. Discussing specific legislation is beyond the scope of this article, but you need to be aware that governments, particularly in developed nations, continue to promote cessation policies. In a state like New York where I live and work, the legislation has extended to restricting e-cigarettes and similar vapor products, despite evidence it helps smokers leave tobacco behind. Despite these realities, overall, 2015 was a year of strength. Currency issues are the other risk to the company's long-term health, but I suspect these are temporary. Looking ahead the company projects full year 2016 earnings to be $4.25 to $4.35 on an absolute basis. Factoring in current exchange rates, on an adjusted basis this is a 10-12% increase over 2015. For now, I continue to like the dividend and its sustainability. Under $90 shares are attractive.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.