Edited By Kata Boehme
Last week, Philip Morris (PM) announced a dividend increase. This move was perfectly in line with my expectations. This company's dividend yield is currently at 3.80 percent, representing an increase of 10.40 percent. Philip Morris continues to be a strong dividend payer, as evidenced by the dividend increase this week.
The simple fact that Philip Morris functions outside the United States gives the company and investors a few significant advantages. First and foremost, it offers a reduced lawsuit risk when compared with its ex-parent (MO), which operates solely within the US. Secondly, Philip Morris shows potential for advancement, as global tobacco usage is still growing. An additional bonus in the existing environment has been exchange rate activities that have favorably influenced PM's finances. If you are anxious that present Fed policies will lead to a weaker US dollar, investing in Philip Morris could be an efficient way to hedge against possibility.
Philip Morris offers a product that has barely changed in the previous five decades. Furthermore, tobacco industry products will likely continue unchanged for the foreseeable future, meaning that this company's R&D costs will remain minimal. As opposed to Apple (AAPL) and Abbott (ABT), PM does not need to release new versions of its leading product each year. Therefore the large quantities of cash it produces every year can easily come back to shareholders. In fact, cash can be returned to shareholders without negatively impacting the business's profit potential. In order to accurately assess Philip Morris's potential I believe it is beneficial to examine the company's recent dividend history.
Dividend History
Declared | Ex-date | Record | Payable | Amount | Type |
Sep 12, 2012 | Sep 25, 2012 | Sep 27, 2012 | Oct 11, 2012 | $0.85 | Regular Cash |
Jun 13, 2012 | Jun 25, 2012 | Jun 27, 2012 | Jul 12, 2012 | $0.77 | Regular Cash |
Mar 14, 2012 | Mar 27, 2012 | Mar 29, 2012 | Apr 12, 2012 | $0.77 | Regular Cash |
Dec 7, 2011 | Dec 20, 2011 | Dec 22, 2011 | Jan 10, 2012 | $0.77 | Regular Cash |
Sep 12, 2012 | Sep 25, 2012 | Sep 27, 2012 | Oct 11, 2012 | $0.85 | Regular Cash |
Sep 14, 2011 | Sep 23, 2011 | Sep 27, 2011 | Oct 11, 2011 | $0.77 | Regular Cash |
Jun 8, 2011 | Jun 21, 2011 | Jun 23, 2011 | Jul 11, 2011 | $0.64 | Regular Cash |
Mar 9, 2011 | Mar 22, 2011 | Mar 24, 2011 | Apr 11, 2011 | $0.64 | Regular Cash |
Dec 8, 2010 | Dec 21, 2010 | Dec 23, 2010 | Jan 10, 2011 | $0.64 | Regular Cash |
Share Repurchase Program
During the second quarter, Philip Morris spent $1.5 billion to repurchase 17.8 million shares, as shown in the table below.
Current $12 Billion, Three-Year Program | ||
Figures in Million | Value Shares | Share |
May-December 2010 | 2953 | 55933 |
January-December 2011 | 5400 | 80514 |
January-March 2012 | 1500 | 18057 |
April-June 2012 1 | 535 | 17774 |
Total Under Program | 11388 | 172278 |
Since May 2008, when Philip Morris began its first share repurchase program, the company has spent an aggregate $24.4 billion to repurchase 449.9 million shares at an average price of $54.21 per share. This repurchase amounts to around 21.3 percent of shares outstanding at the time of the split in March 2008. During the most recent quarter, PM announced a new three-year share repurchase program worth $18 billion, as well as a share repurchase target for 2012 of $6 billion.
Free Cash Flows
For the years 2009, 2010 and 2011, Philip Morris produced free cash flows amounting to around $25.5 billion. However, during this period the company also issued slightly more debt than it was able to repay. These debt issues were covered at length in a previous article. Over this period, Philip Morris invested about $13.5 billion in dividends, and about $15.5 billion in net share repurchases. Only a little more than half a billion was invested in net buying. Overall, it would be much better from a dividend investor's perspective to spend a little more on dividends and less on repurchases, but even so, Philip Morris seems to manage its cash flows quite competently.
Conclusion
At present, Philip Morris is at its best. It can certainly be agreed upon that all the news in regards to this company is in the favor of its stockholders. However, analysts and experts have disparate opinions with regard to dividend growth and the company's share repurchase program. Warren Buffett, in his 1999 letter to Berkshire Hathaway shareholders, captures the major elements of a sensible share repurchase program. To paraphrase, Buffet noted the importance of having excess cash in free cash flows, as well as smart funding potential beyond the near-term requirements of the business. He then notes that if, after all these measures are in place, the company still has cash left over, that money ought to be returned to shareholders who are, after all, the owners of the business.
Philip Morris is one company that follows Warren Buffett's suggestions. The management consistently offers cash dividends, and is also engaged in a giant stock buyback program. Of course, the risks are inherent in investing in a tobacco company. There is always the possibility of lawsuits and change in people's habits. However, compared to its ex-parent PM is more diversified, making it less risky. It operates in more than 180 countries worldwide. Apparently, the governments around the world do not have any intention to interfere with the tobacco companies, as it provides a major source of tax for them.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
