In January, shares of cigarette maker Philip Morris (PM) traded close to $80, a new all-time high. Then a few analysts came out and downgraded the name, citing valuation as their key issue. The stock pulled back, falling under $73 at one point. On those downgrades, I called it a tremendous buying opportunity. Last week, the name traded over $90 briefly, and has come down a little with the small downturn in the markets. We even got one downgrade from an analysts. Want to guess why? If you said valuation was the reason, you are correct, my friend. Philip Morris is a tremendous company to own right now, and is one of the best value names on the market currently. I believe this name goes to $100, and you need to take advantage of any pullbacks.
So let's get into some reasons to buy. I discussed some of these a few months ago, but some of the numbers in that article need to be updated. I'll first start with the stock buyback. Philip Morris, when it announced its fourth quarter and full year results, announced its intentions to buy back $6 billion of stock this year. Now, we don't know how even that buyback will be throughout the year, but let's say it is even. That means they've bought back about $1.6 billion so far this year (prorated for 3 months and a week). That still leaves $4.4 billion roughly for the rest of the year. That may not seem like much on a $150 billion plus company, but it still is about 3% of the current value, and that is a decent amount. Also, you can be assured that if the stock does pull back, it won't be for long, as the company will use those opportunities to buy shares at lower prices. I'm sure they bought back some on that fall from $80 to $73, and if we continue lower here, they may pick up some more.
Some may not consider the buyback the most important reason to buy the name; I just mentioned it first. The real reason many investors like this name is the nice dividend the company pays to its shareholders. At the moment, the company is paying $0.77 per quarter, or $3.08 per year, which means a current yield of approximately 3.5%. Yes, the name did yield over 4% when the name was below $77, and was close to 4.25% during those January lows. However, I think investors are fine with the yield going from 4.25% to 3.50%, considering the stock has gone from $73 to $88. That is a more than 20% move. Just take a look at the following table, which shows the dividend increases since the company went public (in a spin-off) during 2008. As a note, the company started off with a $0.46 cent dividend in 2008, but then increased it to $0.54, so that 17% increase is the change from the $0.46 number to the $0.54 one.
I expect them to raise the dividend again this year. The last couple of years, they have raised it for the September payout, so there should be one more quarter of the 77 cent dividend. I expect them to raise it, although I don't think we'll see the 20% raise we saw last year. I'm expecting a raise to perhaps 82 to 85 cents per share, but there is a chance they could do a little more. For convenience, I provide the following table, which shows what the yield would be at various dividend rates and stock prices. The top row shows the quarterly dividend, with the yield being an annual one. The left column shows the stock price.
With my range of $0.82 to $0.85, I would be giving the company approximately a 3.75% yield based on current prices. I think investors would be happy with that.
There is more than just the dividend and the buyback. Let's not forget this is a growing company. Philip Morris is estimated to grow revenues by more than 3% this year and 5% next year. That is better than a few other names in the industry, primarily Altria (MO), Lorillard (LO), and Reynolds American (RAI). The following table shows estimated revenue and earnings per share growth for each for this year and next year, which are represented by "CY" and NY", respectively.
|CY Rev Growth||3.2%||4.3%||0.1%||-23.2%|
|NY Rev Growth||5.3%||1.7%||0.9%||6.1%|
|CY EPS Growth||8.8%||7.3%||5.7%||12.6%|
|NY EPS Growth||10.9%||7.7%||7.7%||11.3%|
As you can see, the two year combined total for revenue growth is highest for Philip Morris. In terms of earnings per share growth, Philip Morris comes in second place, but still with nice growth prospects. As you can see from the next table, Philip Morris dominates the industry in terms of its three primary margins (trailing twelve months). The company boasts the highest gross margins, by a wide margin, the second highest operating margin, and the highest net profit margin.
Now, because it has more growth potential, higher margins, and a great dividend plus buyback, Philip Morris has become an investor favorite, especially in recent months, where it has rallied from the low $70s to the high $80s. As the price has been pushed up, the company's valuation has as well, which is why you see these analyst downgrades based on valuation. Analysts see the stock as expensive, relative to its peers, but usually after the stock comes down a few points, the valuation is fair again and buyers come in. As you can see from the following table, Philip Morris does trade at a premium to the others. However, I feel that premium is justified, given all of the information I've presented here. The table shows the price to sales and price to earnings ratios, for the expected sales and earnings this year and next. Philip Morris seems a bit overvalued based on price to sales, but when you look at the price to earnings ratio, it isn't that much more expensive than some of the others. Like I said, I feel that premium is justified.
Philip Morris is going to $100. It is just a matter of when. Philip Morris is doing exceptionally well right now, and they were recently able to raise prices in three of their markets. That will help increase revenues and should be beneficial to margins over time as well. The company will also buy back another $4 billion plus this year, and is paying out more than $3 a year currently in dividends. Expect a dividend hike in a few months. Also, the analysts that downgrade the name have been forced to raise their earnings expectations on the name. Philip Morris guided its earnings for 2012 in a range of $5.25 to $5.35, and at that point, analysts were just at $5.19. They are now at $5.31. The company has beaten expectations the past four quarters, so it is completely possible that it does better than that $5.35 number this year. This company has been, is, and will continue to be one of my favorite value names. Growth, a dividend, and a buyback make this name an investor favorite. The stock has done exceptionally well lately, as you can see from the following 6 month chart. As you can also see, most declines have been short lived. Philip Morris is a great name to be in, and you should buy on any pullbacks you can get.
(Source: Yahoo Finance)