Edited By Adam Isaac
Philip Morris International Inc. (PM) is one of the largest cigarette producers in the world. The company produces seven of the world's top 15 international brands, including Marlboro, the number one cigarette brand worldwide. PM's products are sold in approximately 180 countries. In 2011, the company held an estimated 16.0% share of the total international cigarette market outside of the U.S., or 28.1% excluding the People's Republic of China and the U.S. In terms of market share, PM is the number one company in 13 markets and number two in a further ten of the 30 largest markets by the cigarette industry size. Some of the other brands in the Philip Morris portfolio are L&M, Bond Street, Parliament and Chesterfield.
Philip Morris has a rich history of steady cash dividends. Since its separation from Altria (MO), the company has paid substantial dividends. PM currently offers a trailing dividend yield of 3.77% and annualized dividend of $3.40 per share. However, it recently announced an increase of 10.4% in its quarterly dividend, which brings its quarterly dividends to $0.85 per share. Thanks to the boosted dividend, the forward yield stands at 3.88%.
The company has shown a steady trend of dividend increases and the quarterly dividend has almost doubled from the levels of the second quarter 2008, when the company paid a quarterly dividend of $0.46 per share. For any dividend paying company, it is extremely important to generate a healthy stream of cash flows.
For the purpose of measuring the dividend stability of Philip Morris, I look at the earnings, debt and cash flows of the company.
Philip Morris revenues have increased by more than 38% in the previous five years. This represents an exceptional growth in revenues for a company operating in a mature and stable industry. Moreover, the firm has been able to generate an impressive operating margin of between 16% and 17.6% in the previous five years. An increasing trend in revenues and operating margin is backed by an incredible increase in the EPS from the levels of 2007.
Philip Morris' earnings per share have experienced a massive increase of 69.5% in the previous five years. Though, the firm reported a drop in sales in its most recent earnings report, it still managed to beat analyst estimates. In the second quarter earnings report, the firm reported net income of $2.32 billion or $1.36 per share. However, revenue fell by 1.8% from the previous year figures of $8.12 billion. Overall, the cigarette volume fell due to the legal issues within the European Union.
PM cash flows are incredibly strong and have been showing an increasing trend. The firm had operating cash flows of $10.5 billion at the end of the previous year, which is significantly higher from the 2009 levels of $7.88 billion. As I mentioned above, the firm is growing its revenue at an impressive rate; it is even more impressive that the company is able to convert most of the revenue generation into cash flows.
Over the past three years, the firm has had capital expenditures between $714 million and $897 million. Furthermore, impressive trend in the operating cash flows trickles down to the free cash flows and the firm generated free cash flows of $9.6 billion in the previous year. In the previous five years, free cash flows for Philip Morris have increased by 56.11%. There are few companies that can match these cash flow trends.
At the moment, Philip Morris' debt stands at $15.7 billion; there was an increase of more than $1.5 billion in its long-term debt. At the end of year 2011, PM had $11.26 billion in U.S. dollar notes, which ranged from 2.5% to 6.875% and averaged a rate of 4.982%. As a result of international operations, the consolidated balance sheet also shows Euro notes of $3.5 billion, with an average rate of 5.1%. The rate on Euro notes ranges from 4.25% to 5.875%.
Philip Morris also has Swiss franc notes yielding between 1% and 4%; these notes are worth $1.7 billion and on average yield 2.8%. In the year 2011, the firm issued five U.S. dollar notes for a total sum of $3.1 billion yielding between 2.5% to 4.375%. There were two Swiss franc notes offering for approximately $697 million and yielded 1% and 2%. It is apparent that the firm has been taking on more debt in the previous three years; however, growth in revenue and earnings is a lot higher than the growth in debt. Moreover, a strong upward trend in cash flows indicates that the firm should not have any trouble paying off its debt and interest obligations.
Philip Morris is a strong brand and the firm is achieving phenomenal growth. My analysis shows that the firm will be able to pay its dividends with ease in the near future; in fact, there is a strong possibility that the firm will increase its dividends in the future. Over the past four years, the firm has been rewarding shareholders, and the increasing cash flows have been pushing dividends up. I expect the upward trend in revenues and cash flows to continue; as a result, the firm will likely increase its dividends in the future.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.