Philip Morris Sparks Interest
A just announced $18 billion stock buyback and 3.7% dividend yield should light up the tobacco giant’s stock.
It’s no exaggeration to describe Philip Morris’ cash flow as smokin’, but what’s even hotter is the cigarette maker’s plan to repurchase $18 billion in stock.
While it’s a staggering figure, representing more than 10% of the company’s market capitalization, Philip Morris International (ticker: PM) has returned to shareholders about $40 billion in total through dividends and share repurchases since March 2008 when it separated its U.S. business with the spinout of Altria Group (MO). The new buyback will be accomplished over three years starting Aug. 1; Philip Morris is just completing a three-year $12 billion buyback.
Shares of Philip Morris rose $1.70, or 2%, to $86.73 on an otherwise flat day for the Dow.
Today, the bullish scenario for the stock requires that cigarette sales take off in emerging markets and that could bring a stock price near $105, according to Morgan Stanley’s best-case of three scenarios for Philip Morris. Analyst David Adelman’s price target, however, is $90, based on a middle-of-the road analysis for the stock.
While that’s only upside of 4%, the rich 3.7% dividend yield and the possibility that it could rise make for an enticing investment for conservative investors facing down stubbornly low interest rates.
Analysts expect Philip Morris to produce long-term earnings growth of 10%, with earnings per share of $5.25 in 2012, and $5.81 in 2013. The stock is trading at 16.5 times this year’s earnings, and about 15 times next year’s estimate. That’s a significant premium to the 12.4 multiple of the Standard & Poor’s 500 index, but it may be deserved for the strength of the brand, cash on the balance sheet and attractive yield.
Adelman cautions that rising excise taxes and competition are risks for the stock.
But Philip Morris also is likely to look forward to improving market share and pricing in Japan, and opportunities in China; Adelman has an Overweight rating on the stock.
CEO Louis Camilleri called the buyback announcement a testament to “steadfast commitment to generously reward our shareholders over the long-term.”
Camilleri was selling shares of Philip Morris at an average price of $85.63 in May, shortly after shares reached an all-time high near $91. But Philip Morris told Barrons.com at the time that while Camilleri sold 70,000 shares then, he still had a beneficial ownership stake of 1.6 million shares. (See Inside Scoop, “Philip Morris CEO’s $6 Million Sale,” May 14.)
And those shares have been good to him and shareholders.
Philip Morris stock has produced a total return of 100% since March 31, 2008, through the end of May, with 33 points of that return coming from the yield. In the same period, Altria generated a total return of 88% including 43 percentage points from the dividend. Meanwhile the S&P 500 eked out an 8.7% total return thanks exclusively to payouts.
Shares have nearly doubled since we suggested in June 2010 that investors shouldn’t quit the stock. (See Weekday Trader, “Get Fired Up Over Philip Morris,” June 3, 2010.)
Philip Morris may raise its payout in the third quarter, according to the dividend forecasting arm of Markit, a financial information services company. After all, buybacks are increasing: They have amounted to something between $5 billion and $5.5 billion per year in recent years, and the new buyback averages $6 billion per year.
Meanwhile, Philip Morris’ payout ratio – at 60% — and its forward-looking yield of 3.9% are lower than its peers.
Altria, Reynolds American (RAI) and Lorillard (LO) boast an average payout ratio of 76% (Lorillard is lowest at 71%), according to estimates for 2012 by Markit. Altria’s indicated yield is 6.6%, while Lorillard’s is 5.3% and that of Reynolds American is 5.9%, according to Markit estimates.
Markit says it expects Reynolds could raise its payout in the fourth quarter. It sees Philip Morris doing so in the third quarter.
There should be more color on cash flow, buybacks and dividends from the company’s investor meeting next week and earnings report in July.