I have been writing articles on dividend kings and single-letter-symbol companies to find some new investment ideas for the portfolio. Each study found two to three interesting companies, but now it's time to spend some time on the other companies in the portfolio to see if any should be sold to make room for better investments. So far there is one sell, Cabela's (NYSE:CAB), and one trim, Harley-Davidson (NYSE:HOG), using covered calls to gain a couple of points. Also reviewed were Omega Health Investors (NYSE:OHI) as buy more, Texas Instrument (NYSE:TXN) as hold and Digital Reality Trust (NYSE:DLR) as buy more.
This article is about Philip Morris International Inc. (NYSE:PM), which is 5.8% of The Good Business Portfolio. The position is above a full position of 4%. The portfolio reviewed PM in September 2016 and rated it a hold. Since then with the election over, 10-year interest rates have gone up 75 BPS to 2.25%, and PM stock price has gone down 10% to just below $90. The question is whether the portfolio buy/hold/sell PM.
Philip Morris International is a holding company engaged in the manufacture and sale of cigarettes, other tobacco products and other nicotine-containing products in markets outside of the United States. Fundamentals of Philip Morris International Inc. will be looked at in the following topics to help make the decision to hold or sell: The Good Business Portfolio Guidelines, Total Return And Yearly Dividend, Last Quarter's Earnings, Company Business Overview, and Takeaways And Recent Portfolio Changes.
Good Business Portfolio Guidelines
Philip Morris International passes 10 of 11 Good Business Portfolio Guidelines. These guidelines are only used to filter companies to be considered in the portfolio. For a complete set of the guidelines, please see my article "The Good Business Portfolio: Update To Guidelines and July 2016 Performance Review." These guidelines provide me with a balanced portfolio of income, defensive, total return and growing companies that keeps me ahead of the Dow average. Some of the points brought out by the guidelines are shown below.
The Good Business Portfolio is based on the fact that it does not follow any one type of investment income, growth, value, and total return. Philip Morris International is intended to be in the steady income group.
Philip Morris International is a large-cap company with a capitalization of $137.6 billion. This size will allow Philip Morris International Inc. the ability to expand its business in low-penetration countries for growth going forward. There are also opportunities in other foreign countries for expansion of the business.
Philip Morris International Inc. has a dividend yield of 4.7%, which is well above average for the market. The PM dividend has been increased for eight years out of the last eight years, and its dividend is very safe. Philip Morris International is therefore a good choice for the dividend income investor. After paying the high dividend, there is still cash remaining for investment in business expansion.
Philip Morris International's last quarter earnings of $1.25 was a bit higher than the expected income of $1.23 and beat last year's earnings of $1.24. Philip Morris International Inc. has a yearly positive total cash flow of $7.6 billion. This earnings beat from the previous yearly earnings shows the earnings growth of the company even with the exchange rate drag of $0.42/year.
I also require the CAGR going forward to be able to cover my yearly expenses. My dividends provide 3.1% of the portfolio as income, and I need 1.9% more for a yearly distribution of 5.0%. Philip Morris International has a good three-year CAGR of 10.0% meeting my requirement. This good future growth for Philip Morris International Inc. can continue the uptrend benefiting from the increased revenues if the exchange rates do not get any worst for PM.
Looking back five years, $10,000 invested five years ago would now be worth over $15,400 today. This makes Philip Morris International Inc. a fair investment for the growth investor looking back, which has future growth as the safe smoking alternatives grow.
Philip Morris International's S&P Capital IQ rating is three stars or hold with a target price of $99.0. Philip Morris International Inc. is 11% under-priced at present compared with the target and is a good buy at the present price for the patient investor that wants a steady income.
Total Return And Yearly Dividend
The Good Business Portfolio Guidelines are just a screen to start with and not absolute rules. When I look at a company, the total return is a key parameter to see if it fits the objective of the Good Business Portfolio. Philip Morris International Inc. missed the Dow baseline in my 46.5-month test compared with the Dow average. I chose the 46.5.-month test period (starting January 1, 2013 and ending to date) because it includes the great year of 2013 as well as other years that had fair and bad performance. The total return of 19.61% makes Philip Morris International Inc. not appropriate for the growth investor. YTD total return for Philip Morris International Inc. is poor at 0.01%, below the market by 6% short term. The portfolio also owns Altria (NYSE:MO), which has a strong up total return of 111% over the test period beating the DOW by a large margin. The combination of Philip Morris International Inc. and Altria make a solid combination that provided income and growth. Philip Morris International has increased its dividend for eight of the last eight years and presently has a yield of 4.7%, which is great for the income investor. Philip Morris International Inc. normally declares its dividend change in August and is estimated to increase the quarterly dividend from $1.04 to $1.07 or about 3% in 2017.
DOW's 46.5-month total return baseline is 43.84%
46.4 Month total return
Difference from DOW baseline
Yearly Dividend percentage
As seen in the five-year price chart below, Philip Morris International Inc. has a fair chart over 2012-2016 YTD that is very flat with strong downturn recently as the interest rates increased.
Last Quarter's Earnings
For the last quarter on Oct. 18, 2016, Philip Morris International Inc. reported earnings that were a bit above expected at $1.25 compared to last year at $1.24 and expected of $1.23. Total revenue was higher at $6.98 Billion and higher than a year ago by 0.7% year over year that missed expected revenue by $30 Million. This was a fair report with bottom line increasing as top line top line increased showing the slow growth of the business because of the exchange rates. At the last earnings call earnings for the year were guided to $4.46 - $4.51 more than the present yearly dividend distribution of $4.16. This leaves cash available for dividend increases and business expansion.
Philip Morris International Inc. is a holding company engaged in the manufacture and sale of cigarettes, other tobacco products and other nicotine-containing products in markets outside of the United States. The Company's products are sold in over 180 markets. Its segments include European Union; Eastern Europe, Middle East & Africa; Asia, and Latin America & Canada. The Company's premium price brands include Marlboro, Merit, Parliament and Virginia Slims; mid-price brands include L&M and Philip Morris, and other international brands include Bond Street, Chesterfield, Lark, Muratti, Next and Red & White. Its local cigarette brands consist of Dji Sam Soe, Sampoerna and U Mild in Indonesia; Champion, Fortune and Hope in the Philippines; Apollo-Soyuzand Optima in Russia; Morven Gold in Pakistan; Boston in Colombia, Belmont, Canadian Classics and Number 7 in Canada; Best in Serbia; f6 in Germany; Delicados in Mexico; Assos in Greece, and Petra in the Czech Republic and Slovakia.
Overall, Philip Morris International is a good business, with 10% projected revenue growth excluding exchange drag of $0.42 this year. The good cash flow provides PM the capability to continue its strong growth in countries where product penetration is low , like India and China. The economy is showing moderate economic (about 2%) growth right now and the FED may raise rates in December 2016 but is dependent on the United States economy. I believe the FED, when it does raise rates it will be a one and done, they don't want to trigger a slowdown in the economy. Philip Morris International Inc. is being hurt right now because of the rising interest rates and exchange rates, but this is mitigated by the growth in the heated tobacco products. Philip Morris International Inc. products are inelastic in price allowing them to raise the price without have too much decrease in demand.
Jacek Olczak (Chief Financial Officer) said the following at the Morgan Stanley Consumer Conference: "Excluding currency, our guidance continues to represent the growth rate of approximately 10.5% to 11.5% compared to adjusted diluted EPS of $4.42 in 2015. As a reminder in the fourth quarter we anticipate strong currency neutral net revenue growth, driven primarily by the growth of Risk Reduced Products (RRPs) principally in Japan and the favorable pricing variance of approximately 8% to 9% of our fourth quarter 2015 net revenues. We also expect a very favorable cost comparison reflecting the incremental investments that we made in the fourth quarter of 2015.
Moving to our RRPs, our commercialization plans for 2016 remain on track iQOS is now available in key cities in 13 markets following increase in launches in Amsterdam, Athens and Madrid and we continue to anticipate the presence in 20 markets by the end of this year".
Takeaways and Recent Portfolio Changes
Philip Morris International Inc. is an investment choice for the income investor with its 4.7% yield in a growing sector of the world society. Philip Morris International Inc. is 5.8% of The Good Business Portfolio and the position will be held as we watch to see what the rates going forward are. When the market goes down PM becomes a stabilizer in the portfolio and often goes up.
Sold covered calls (December 9th $54.5 strike price) on a portion of the HOG position to make some money while I wait for the buyout or something to make me want to trim the position.
Increased position in Digital Investors Trust to 1.00% of the portfolio to take advantage of the recent dip to add to the position of a long term growth company.
Trimmed Cabela's from 4.5% of the portfolio to 3.9%, they have received a bid of $65.50 cash for their shares, which to me is a fair price. I want to take a bit off the table in case the deal does not go through. I also would like to deploy the proceeds to increase the dividend paying companies in the portfolio. The last earnings report was not good and it may be time to take a good profit while I can in case the deal does not go through. Management is spending too much money to keep revenue up causing earnings to decrease
Increased Omega Healthcare Investors from 4.7% of the portfolio to 4.8% of the portfolio, I needed a little more income and OHI will give that to the portfolio. The portfolio will fill in the open portfolio slot with Kellogg (NYSE:K) when cash is available followed by PepsiCo Inc. (NYSE:PEP) when the next slot is open.
The Good Business Portfolio generally trims a position when it gets above 8% of the portfolio. The four top positions in The Good Business Portfolio are, Johnson and Johnson (NYSE:JNJ) is 8.3% of the portfolio, Altria Group Inc. is 7.4% of the portfolio, Home Depot (NYSE:HD) is 7.7% of portfolio and Boeing (NYSE:BA) is 8.7% of the portfolio, therefore JNJ and BA are now in trim position with Home Depot and Altria getting close.
Boeing is going to be pressed to 10% of the portfolio because of it being cash positive on individual 787 plane costs at $151 Million in the third quarter. The recent earnings blew away the estimate of $2.63 and came in at $3.51. BA has just received a large order for 15 747-8 planes which will help keep this line open. BA is a long term buy and has a backlog of over 7 years.
JNJ will be pressed to 9% of the portfolio because it's so defensive in this post BREXIT world. Earnings in the last quarter beat on the top and bottom line but Mr. Market did not like growth going forward. JNJ is not a trading stock but a hold forever, it is now a strong buy as the healthcare sector was under pressure from the election.
For the total Good Business Portfolio please see my recent article on The Good Business Portfolio: 2016 Second-Quarter Earnings and Performance Review for the complete portfolio list and performance. Become a real time follower and you will get each quarters performance after the earnings season is over. Third-quarter earnings and performance with be available in a few weeks after HP Inc. (NYSE:HPQ) reports earnings.
I have written individual articles on CAB, JNJ, EOS, GE, IR, MO, BA, Omega Health Investors, TXN and HD that are in The Good Business Portfolio and other companies being evaluated by the portfolio. If you have an interest please look for them in my list of previous articles.
Of course this is not a recommendation to buy or sell and you should always do your own research and talk to your financial advisor before any purchase or sale. This is how I manage my IRA retirement account and the opinions on the companies are my own.
Disclosure: I am/we are long BA, JNJ, HD, OHI, MO, HOG, PM, TXN, CAB, DLR.
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.