Philip Morris Ups The Ante Again

Jun.14.12 | About: Philip Morris (PM)

Philip Morris International (NYSE:PM), the international arm of Altria (NYSE:MO) that was spun off back in March of 2008, increased its share repurchase program, again. During the first quarter of 2012, Philip Morris repurchased $1.5 billion of stock. Since May 2008, when PM began its first share repurchase program, the company has spent a total of $22.9 billion to repurchase 432.1 million shares at an average price of $52.88 per share, or 20.5% of the shares outstanding at the time of the spin-off in March 2008. For 2012, PM has a $6.0 billion share repurchase target. Since it was spun off, shares have appreciated more than 76%, while the quarterly dividend has increased almost 68% (to $0.77 per share from $0.44 per share) over the same time period, yielding shareholders a considerable return.

Over the next three years, Philip Morris plans to purchase $18 billion of stock, which is roughly inline with its previous share repurchase programs. The repurchase program is expected to begin on August 1 of this year, after the existing $12 billion share purchase program is completed. I am not normally the biggest fan of stock repurchasing programs as it artificially increases earnings per share results and hides some fundamental problems with strong headlines. However, that is not the case with Philip Morris. From 2007 to 2011, free cash flow grew from $4.5 billion, to $9.6 billion, with an annualized growth rate of 16.4%.

Volumes for the company continue to be relatively strong, with total volumes increasing 5.4% year over year during the first quarter. Only the European Union segment saw its volumes decline compared to the first quarter of 2011, falling 1.5%. However, growth of 12.4% in its largest segment, Asia, more than offsets that decline. Asia's growth should continue to remain strong, and we are looking for a small decline in European volumes through the remainder of the year.

The stock has been on a strong run over the past year, being up more than 25% over the past 12 months. The stock is slightly off its highs and is forming support above $85. The stock is trading with a trailing price to earnings (NYSE:PE) ratio of 17.2, while its forward PE ratio is only 14.9 which leaves room for 15% of appreciation. Additionally, over the past twelve months, revenue is up 13.4% compared to the industry average of an 11.4% decline. Shares of PM offer an opportunity to invest in a company with room for both capital appreciation and income growth through its 3.6% yield.

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