Philip Morris Is Still Smokin' Outside The U.S.

| About: Philip Morris (PM)
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Completing its spinoff from Altria Group (NYSE:MO) in March of 2008, Philip Morris International (NYSE:PM) was proposed to have the benefit of freedom from the U.S. market, with all the litigation and falling consumption that market posed. Growth opportunities were purported to be plenty, particularly in Asia. Here is how things have developed since then:

Cigarette Volume(In Millions) 2011 2010 2009
European Union 211,493 222,964 235,300
Eastern Europe, Middle East and Africa 290,250 289,312 298,760
Asia 313,282 282,290 226,204
Latin America & Canada 100,241 105,290 103,779
Total 915,266 899,856 864,043

That equates to an average annual increase in volume over the time period of just about 3%. Asia, however, has grown 38.5% in volume, and now makes up more than 1/3 of the company's total volume. True to their word at the time, they've realized rapid growth in their Asian markets.

Also during this time period, net revenues have increased 23%, excise taxes have increased 22% and the combined operating income of the geographic regions has increased 32.5%. The company's excise taxes come by far the most from the European Union, at 45%, as well as net revenues, at 39%. Operating income is the highest in Asia, which also has the lowest excise taxes as a percentage of revenue by far in comparison to the other geographic regions. Clearly Asia is the winner of their geographic regions. Still having little presence in China, India, Bangladesh and Vietnam, the company hopes to further penetrate these markets which make up a large 2/5ths of the total international cigarette consumption.

Based on the estimated total international cigarette market of 5.7 trillion in volume (up slightly from 2010), Philip Morris figures itself to have a 16% market share, or 28.1% excluding China. There is still plenty of room for them to grow as that is a lot of untapped potential.

Unfortunately its dividend yield pales in comparison to many other companies in its industry at this point. In addition to Altria, Lorillard (NYSE:LO), Reynolds American (NYSE:RAI) and British American Tobacco (NYSEMKT:BTI) all have very near or north of 5% yields currently. It can't be attributed to Philip Morris' share price outpacing theirs either, since Lorillard's is actually slightly higher over the same period and Altria's is comparable.

I'm not a big fan of share buybacks generally, and would have preferred to have seen their recently announced 18 billion one utilized as a dividend. The return of Philip Morris' share price has been more than exceptional since it has started to be publicly traded, well exceeding the S&P 500 index. While not looking exorbitantly overheated, with a P/E ratio of 16, it doesn't seem like a particularly astute time to begin the share buyback program either with such a share price rise recently.

After announcing the 4th straight quarter of a 77 cent dividend, a new hike is to be expected for the fall. Assuming a 15% hike -the average of the last two- that would leave the company at a yield of around 4.2% based on the current price. Certainly not bad, particularly with the low yields prevalent today, but it could be better.

A part of the flight to tobacco companies is surely due to income-starved investors searching far and wide for yields, and after interest rates start to rise, tobacco companies may start to cool off a bit as they will seem less attractive. To any true long-term investor of dividend stocks, this is not necessarily a bad thing of course, with dividends reinvested it will be at more advantageous prices, with more shares garnered.

The bottom line for them going forward is success in the aforementioned 4 countries, especially India and China, the largest ones. The international cigarette market is still growing, albeit at a miniscule clip. For any meaningful growth to take place within the company, it has to come from market share expansion. With high barriers to entry, and such recognizable brands as Marlboro, they have the ability to do this going forward in my opinion. So far for the first quarter of this year they are keeping up with this goal: volume in their Asian region is up 12.4% year over year, leading them to an overall 5.4% increase in volume.

Disclosure: I am long PM.