Philip Morris: New 3.9% Yield 30-Year Notes

| About: Philip Morris (PM)

On August 21, 2012, Philip Morris (NYSE:PM) issued $750M in new 30 yr corporate bonds. These are callable bonds that are rated A2 by Moody's (NYSE:MCO). Philip Morris' investor relations shows SEC filings for three new bonds; totaling $2.25B.

Redemption for Tax Reasons

...August 21, 2042, and are not redeemable prior to maturity except upon the occurrence of certain tax events described below.

We may redeem a series of notes prior to maturity in whole, but not in part, on not more than 60 days' notice and not less than 30 days' notice at a redemption price equal to the principal amount of such notes plus any accrued interest and additional amounts to the date fixed for redemption if:

  • a change in or amendment to the tax laws, regulations or rulings of the United States or any political subdivision or taxing authority of or in the United States or any change in official position regarding the application or interpretation of such laws, regulations or rulings (including a holding by a court of competent jurisdiction in the United States) that is announced or becomes effective on or after August 21, 2012, we have or will become obligated to pay additional amounts with respect to such series of notes as described above under "Payment of Additional Amounts," or
  • action is taken by a taxing authority of, or any decision is rendered by a court of competent jurisdiction in, the United States or any political subdivision or taxing authority of or in the United States, including any of those actions specified in the bullet point above, whether or not such action is taken or decision is rendered with respect to us, or any change, amendment, application or interpretation is officially proposed, which, in any such case, in the written opinion of independent legal counsel of recognized standing, will result in a material probability that we will become obligated to pay additional amounts with respect to such series of notes and we in our business judgment determine that such obligations cannot be avoided by the use of reasonable measures available to us.

Altria & Philip Morris International

In 2008, Altria (NYSE:MO) spun off Philip Morris International. Altria's older bonds are still named Philip Morris Cos Inc, and because their credit rating is lower, their yields are higher.

For investors looking for call protected tobacco bonds; Altria's Philip Morris Cos Inc. 01/15/2027 corp. indenture are non callable. Here is a cross examination of related tobacco corp. bonds:

NEW Philip Morris Intl Inc 3.8% 08/21/2042 (CUSIP: 718172AU3) (not call protected, not continuously callable)

price: $98.83 yield: 3.94%

credit rating: A2/-

Altria Group Inc 4.25% 08/09/2042 (CUSIP: 02209SAM5) (not call protected, not continuously callable)

price: $96.85 yield: 4.44%

credit rating: Baa1/BBB

Philip Morris Cos Inc 7.75% 01/15/2027 (CUSIP: 718154CF2) (call protected)

price: $134.24 yield: 4.49%

credit rating: Baa1/BBB

Altria Group Inc 9.25% 08/06/2019 (CUSIP: 02209SAJ2) (not call protected, not continuously callable)

price: $141.88 yield: 2.61%

credit rating: Baa1/BBB

Note that Philip Morris International's stock has a 3.4% dividend yield and Altria's stock is 4.7%.

Last year, Seeking Alpha author Stephen Rosenman wrote, Philip Morris: Buy The Stock or the Bond? Those were new issue 4.37% coupon 30-year corp. bonds; less than a year later, Philip Morris' rate is 15% less. It is interesting to note that Seeking Alpha author Rajiv Tarigopula points out Microsoft Bonds Offer 3.5% + Yields.

The difference is Microsoft is rated Aaa, while Philip Morris is rated A2. Philip Morris is rated 5 notches below Microsoft; their bonds yield about 12% more. While the Philip Morris Cos bonds yield around 25% more than the Microsoft bonds because they are rated Baa1.

For investors interested in tobacco company debt, the call protected 2027 Philip Morris Cos bonds should recoup their premium in about four years. The next coupon payment for them is 01/15/2013.

Tobacco Free Alternative

Clearly, companies are trying to take advantage of very low interest rates. In December 2011, Moody's stated:

Moody's: Packaging law is credit negative for Australian tobacco industry but unlikely to affect European manufacturers' ratings

Then on July 4, 2012, Moody's stated:

Industry Outlook European Tobacco: Profits to Remain Robust as Pricing Resilience Offsets Sales Volumes Declines

Some foundations and individuals simply will not invest in tobacco. Because of the effects of tobacco products on consumers. For an alternative to tobacco, investors might consider a current offering of even lower rated ConAgra (NYSE:CAG) subordinate notes.

ConAgra Foods Subordinate Note 9.75% 03/01/2021 (CUSIP: 205887AC6) (call protected)

price: $140.53 yield: 4%

credit rating: Baa3/BBB-

Compared to Philip Morris & Altria:

Philip Morris International 5.6% 03/26/2020 (CUSIP: 718172AH2) (not call protected, not continuously callable)

price: $115.61 yield: 2.2%

Altria's 2.85% 08/09/2022 (CUSIP: 02209SAN3) (not call protected, are continuously callable) price: $98.61 yield: 3%

Moody's rates ConAgra debt Baa2 and ConAgra's subordinate debt Baa3. The company was reviewed for a possible downgrade last year:

Moody's Investors Service placed the Baa2 long-term rating and Prime-2 short-term rating of ConAgra Foods ("ConAgra") under review for possible downgrade following the company's announced unsolicited proposal to purchase Ralcorp Holdings ("Ralcorp") for $7.4 billion, including $4.9 billion in cash and $2.5 billion in assumed debt.

However, on September 20, 2011, "Moody's confirm[ed] ConAgra's Baa2 rating after withdrawal of Ralcorp bid." Again the premium on these bonds is not desirable; however, the yield is over twice the 10 yr. US Treasury yield.

Fixed Income Comparison

The new Philip Morris International bonds should make about $1,100 per bond in 30 years, if they are not called. While the Philip Morris Cos bonds should generate about $743 profit (accounting for the premium) in 14 years. The ConAgra bonds should pay $371 profit (accounting for their premium) in the next eight years.

To put the new Philip Morris bonds into perspective, Aa2 rated Berkshire Hathaway Finance Corp. 4.4% 05/15/2042 medium term notes (CUSIP: 084664BU4), guaranteed by Berkshire Hathaway Inc. (NYSE:BRK.A) currently yield 4%. That is only 1% more than the new Philip Morris International bonds; however, the Berkshire bonds are 3 credit ratings higher.

If you have any comments or would like to suggest another security that to consider please comment below.

Disclosure: I am long MO, BRK.B. 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.

Additional disclosure: I am long ConAgra Foods Subordinate 9.75% 03/01/2021

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