Phillip Morris: 10 Reasons To Buy This Dividend Stock Before Next Thursday
Friday, July 17, 2009
Guest Editorial by Louis Basenese, Advisory Panelist, Investment U
Editor’s Note: In last Friday’s column, Investment U’s Louis Basenese gave his six-step guide to finding safe, solid dividend-yielding stocks. Today, as Lou says, this is when “the rubber hits the road.” Read on to find out which stock Lou says you must buy before next Thursday (July 23) - a stock that boasts a 5% yield and has the potential to churn out a double-digit capital return, too.
Martin Denholm, Managing Editor, Smart Profits Report
Cash Flow Is Key
When it comes to evaluating the safety of a dividend, the first thing we need to verify - given the current economic slowdown - is demand for a company’s products. After all, a company needs to generate a steady stream of cash in order to keep paying its shareholders.
But this dividend stock is ideally suited to weather the economic mess and is well capable of bolstering your income.
Look no further than Philip Morris International, Inc. (NYSE: PM).
Repeat Business… No Matter What The Economy Is Doing
I’m going to give you 10 reasons why Philip Morris’s dividend-paying capability is so solid.
And given that consistent business is so crucial to a company’s cash flow generation, it’s no surprise to see that the first three reasons all focus on the firm’s rock-solid demand…
1. Recessions Don’t Matter: As you might suspect, addictive products tend to enjoy the steadiest demand. In fact, based on empirical evidence from Citi Investment Research, the last two recessions “had no material effect on [cigarette] demand.” This recession should be no different.
2. Population Growth Offsets Higher Taxes: Obviously, demand is not inelastic. Consumers are sensitive to price changes. And as the world’s governments contend with sagging economies, they continue to hike cigarette taxes in order to meet budget obligations.
The World Health Organization estimates for every 10% increase in price, demand slips by 4% in mature markets and by 8% in developing markets. However, when you factor in population growth, the impact is almost cut in half. More importantly, Philip Morris’ highest margin markets (accounting for 60% of revenues) come from the less impacted mature markets. In other words, the company’s profits are extremely durable.
3. Emerging Markets: The WHO estimates that 80% of the world’s 1.3 billion smokers live in developing countries. And sales in emerging markets are increasing modestly, compared to declining volumes in developed markets.
Philip Morris is uniquely positioned to capture the lion’s share of this growth. It operates in 160 countries and derives over 60% of its sales from emerging markets. It also owns seven of the leading 15 international brands, including the hands-down leader, Marlboro.
So it’s no surprise that total volumes increased a steady 2.5% in 2008. And total sales, net of excise taxes, increased by 12.7% to $25.7 billion. As management acknowledges, there’s no mistaking that, “This strong performance was driven by emerging markets.”
Now how about that cash?
If Cash Is King, Philip Morris Rules
Beyond steady demand, we also need to verify that cash isn’t being misspent and thus jeopardizing the dividend payment. The next three reasons pertain to Philip Morris’ ability to pay its dividend indefinitely…
4. Ample Free Cash Flow: In 2008, Philip Morris generated $6.8 billion in free cash flow, thanks to solid sales growth, supply-chain optimization and other cost-cutting initiatives. That was a year-over-year increase of 52.7%. Best of all, this figure should keep climbing, as the company is only about halfway through its three-year, $1.5 billion cost-reduction program.
5. A Solid Cash Buffer: With $2.4 billion in the bank, Philip Morris is sitting on enough cash to cover two quarters worth of dividends.
6. Minimal Litigation And Regulation Risk: The 2008 spin-off from Altria eliminated the legal and regulatory risks facing domestic operations. In other words, we don’t have to worry about the possibility of any adverse judgments that would require Philip Morris to pay enormous settlements and hinder its ability to pay short and intermediate-term dividends. Same goes for newly passed legislation, which grants the FDA regulatory control over the industry.
7. Credit Is No Concern: The bulk of the company’s debt was issued before the credit markets soured. And because it’s well laddered at “attractive interest rates,” there’s no concern about interest costs skyrocketing and cutting into dividend payments, due to untimely refinancing. Should any emergencies arise, the company can tap into its $6 billion in unused bank credit lines.
8. The Payout Ratio Is Conservative: Even after increasing the dividend by 17.4% in August (to $0.54 per quarter), Philip Morris still only paying out 61% of profits. So profits would need to drop dramatically in order to pose an immediate threat to the current payout. The low ratio also leaves plenty of room to increase the dividend.
Now for the final two reasons why Philip Morris’ dividend is solid…
Management Strength And A Currency Boost
The final two reasons the company’s dividend is safe pertain to management and market predictions. Because they’re subjective, they’re not significant on a stand-alone basis. But they do contribute positively to the overall outlook for the stock…
9. Management Pedigree And Commitment: Remember, Philip Morris spun off from Altria, which had increased its dividend in 39 out of the last 41 years. That history and “commitment to reward our shareholders generously” is ingrained in Philip Morris’ management. And as the CFO reveals, if maintaining that commitment “means that the payout ratio overshoots 65% [occasionally], so be it.”
10. Currency Tailwinds: A strong dollar hurts results because Philip Morris is based in the United States, yet records almost all of its sales in foreign markets. However, many experts (including yours truly) believe the dollar is doomed, which will only magnify the company’s profitability.
A Solid Dividend… And 14% Earnings Growth To Boot
In the end, the fundamentals above prove the most important thing to income-seeking investors: The dividend is safe.
They also point to the prospects for steady share appreciation. After all, the stock is trading cheaply at just 12 times earnings. Management also expects to increase earnings by 14% next year.
As CFO Hermann Waldemer explains, “We have excellent momentum going into 2009. Our market shares are growing overall… And our share growth is accelerating [too].”
And this is the reason to buy before the company reports its quarterly earnings on July 23: Because we’ll get proof. If we wait for the results, I’m afraid the shares will get away from us and diminish the yield.
At current prices, Philip Morris pays a reliable 5% with strong prospects for stock appreciation, too. So don’t miss out.
Good investing,
Louis Basenese
Editorial Endnote: We just gave you a free stock pick in today’s issue. But my colleagues at Investment U tell me that they can’t do this very often out of fairness to paying subscribers. So if you want to continue receiving safe dividend stock picks, be sure to join The Oxford Club. A one-year subscription costs about the same as a good dinner for two. What’s more, the mid-month newsletter issue is undergoing an overhaul and will soon be dedicated exclusively to dividend-paying stocks, plus other safe ways to generate retirement income. To join, simply visit this link.
How One Company's Groundbreaking "Cancer Blaster" Could Make You Rich
While the World Health Organization predicts 12 million people will develop cancer in 2009, this little-known company is fighting the surge with its amazing cancer-killing device...
Although most people know nothing about it, this "Cancer Blaster" has already saved thousands of people around the world... Like Ohio resident, Caroline Brubaker, who says "with just three, pain-free outpatient visits, I had my life back" or Richard Swanson of Arizona who ended up cancer-free after just 4 hours of treatment...
The best part is, the company recently discovered an extraordinary breakthrough that could go mainstream in a matter of days... Read the full details to find out how you can get in ahead of the event - and be on your way to booking truly incredible gains.
|
One Response to “Phillip Morris: 10 Reasons To Buy This Dividend Stock Before Next Thursday”
Due to the amount of comments we receive Smart Profits Report will not be able to respond to all questions. By submitting your comment you agree to adhere to our Comment Policy.
Got something to say?
Would you enjoy belonging to a club that gloats over rich dividends thrown off by a company whose products are addictive and kill people? Give us a break.