Philip Morris: A Great Play For DGI Portfolios, But Wait For A Better Entry Point

Sep.18.12 | About: Philip Morris (PM)

Philip Morris International Inc. (NYSE:PM) manufactures and sells cigarettes and tobacco products outside of the United States. The company consists of many brands with top or near-top market share for high-, mid-, and low-price points. The most well-known brand within the PM portfolio is Marlboro, which accounts for roughly 35% of the company's shipments. PM is the result of a March 2008 spin-off from Altria (NYSE:MO). After the spin-off, PM became responsible for all international operations, and MO handled domestic operations.

General Stock Information

PM stock currently trades at $89.48 per share and pays an annual dividend of $3.40/share. Shares have climbed approximately 12% YTD. Earnings for this year are projected to come in at $5.05 and earnings growth for the next five years is projected to come in around 13%, significantly outpacing the tobacco industry due to the company's exposure to rapidly growing markets outside the US. PM sports a P/E ratio (17.7) above the tobacco industry average, but this is not unreasonable for an industry-leading company with growth well above the industry average.

Long term debt on the balance sheet comes in at $8.70 per share, and the company has a current ratio of approximately 1. With the company performing at or above industry average in categories such as ROE, ROA, as well as gross and net margin. Since the spin off from Altria, the PM dividend has increased in each of the past five years, from a quarterly dividend of $0.46 to its current $0.85.


With a current P/E ratio of 17.7 and growth projected in the low teens for the next five years, the shares appear to be well-situated to continue growing. With Philip Morris International's ability to pursue growth in emerging markets and capitalize on the popularity of the Marlboro brand, the stock appears poised to continue growing earnings and increasing the dividend as the share price grows. PM is a cash cow, and with a current payout ratio of 67% the dividend appears to be well covered at this time.

If the management of PM is able to meet the projections for earnings growth and identify additional markets and opportunities for continued growth, as it has in the past, this is a stock that will provide meaningful capital appreciation and dividend growth for DGI investors for years to come. Although over the long term, smoking around the world is likely to decline as it has in the US, domestic tobacco companies have shown the ability to pass along higher prices to customers in order to maintain and grow revenues.

Author's Opinion

Although the dividend payout ratio is higher than that of a stock I typically invest in for dividend growth, the high quality of this stock, the relatively high yield, and the projected earnings growth lead me to consider this stock as a worthy addition to a DGI portfolio. I view Philip Morris International as an excellent long-term investment for a dividend growth investor. With the company's history of aggressively raising the dividend along with nearly doubling the share price over the past five-year period, which included the most recent recession, management has shown a commitment to returning value to shareholders.

PM is a terrific stock and represents a long-term play for both DGI investors as well as pure growth investors. Although I do love PM stock, and I do love the dividend/dividend growth the stock provides I believe investors should wait for a pullback in the share price before investing. I would look to initiate or add to an existing position on pullbacks at or below $80/share.

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