On Fire or Flaming Out?
Chad is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There are some stocks that seem like such obvious winners that they almost pick themselves. However, with every company there is some big worry, or future issue that keeps investors away. With a company like Philip Morris International (NYSE: PM) the big worry is future regulations and the rise in health consciousness around the world. When people talk about Philip Morris they usually also talk about Altria (NYSE: MO) the former parent company. The problem with even mentioning them in the same breath is these are two very different companies headed in different directions.
Philip Morris recently reported earnings, that gave us the most recent glimpse of what this growth company is doing. As outlined by fellow fool Seth Jayson, Philip Morris basically did everything you could ask of a company. The company increased revenues by 9.7%, EPS by 18%, and margins were up across the board. The company also showed increased volumes, which grew by 5.3% excluding acquisitions. The company also repurchased $1.5 billion worth of shares at an average price of $82.87. The interesting part is, Philip Morris is actually a great play on the growth in Asia, the Middle East, and Africa. These combined markets made up 62% of revenues and 63% of profits. With these regions growing revenues and earnings by 14% and over 20% respectively, these are huge growth drivers.
Probably the biggest difference between Philip Morris and Altria is, the difference in the direction of their free cash flow versus their dividend payments. While Altria has saturated the U.S. market and is fighting constant legal battles to defend itself, Philip Morris has much less legal issues, and is growing in its markets. Look at the difference in free cash flow payout ratios between the two companies in the last three years:
You can see that while Philip Morris is showing steadily decreasing amounts of its free cash flow being paid out, Altria has been paying out 85% to over 100% of its free cash flow.
With Philip Morris' current yield at 3.43%, the company's yield is impressive already. The fact that the company has been growing its payout by 9.37% over the last few years is even better. The company's free cash flow payout ratio was nearly 55% three years ago and stands at 45.5% today. I wouldn't be surprised when the September dividend increase is announced, if it were an increase of 20% like last year. If this occurs, the company's yield would jump over 4% again based on today's price.
When it comes to earnings, analysts expect the company to grow earnings by about 10.67% over the next few years. However, Philip Morris has generated an impressive record of beating expectations. In fact, over the last four quarters, the company has beaten estimates every quarter by an average of 6.55%. To boost EPS, Philip Morris is committed to buying back about $6 billion worth of shares in 2012. Having already spent about $1.6 billion this year, that leaves about $4.4 billion for the remainder of 2012. At current prices, this $4.4 billion would retire about 49 million shares, or equivalent to 2.84% of the current outstanding shares.
It's rare to find a company like Philip Morris that has a good current yield, the potential for excellent dividend growth, and organic growth behind it. I know there are personal reasons that individuals have for not buying certain stocks. While I respect those reasons, if you are not opposed to buying a company like Philip Morris, it seems to have literally everything going for it. Like I said, sometimes stocks almost pick themselves.
MHenage has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.