Smoke That You Must Buy

By Piyush Arora - October 2, 2012 | Tickers: MO, LO, PM | 0 Comments

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The beauty of the consumer goods segment is that it is almost recessionary resistant. The companies in this segment, manufacture and market products that are needed on a daily basis by millions. The same rationale goes around with the tobacco companies, as the consumer products these companies manufacture are used by both pleasure seekers and compulsive addicts. This gives stability to the top-line of tobacco manufacturing companies like Philip Morris (NYSE: PM).

Philip Morris is one of the largest tobacco companies in the world. The company has 15 major global brands in its kitty with Marlboro being one of them. The company has its footprint in more than 180 countries. Philip Morris ranks second in terms of market share in the world’s top 30 tobacco consuming nations which excludes the US. In 2003, the US division of Philip Morris changed its name to Altria Group (NYSE: MO), and Altria continues to hold 100% of its stake in Philip Morris US. The company now has all its operations outside of the United States, and internationally the company has acquired a market share of 16%.

Talking about a food chain or a burger chain, the company would need to come up with new offerings to give their customers a stimulating experience whenever they eat at the joint. The thing with tobacco companies is that, people love their products and ultimately get addicted to them. Personally I don’t smoke, but as far as I know addicts don’t need new stimulants for their taste buds. Anything that’s tried and tested, suits the taste buds and gives the user a high, does the job. This saves the R&D expenses along with the added burden on the companies to come up with something new to retain their market share.

The industry however is witnessing growing health concerns across the globe. The revenues from Europe and Australia were down due to the ban on tobacco advertisements and billboards. In a bid to cater to the smokers wanting to have healthy alternatives, Philip Morris announced a new type of cigarette which poses significantly lower health risks compared to regular offerings. The company expects to roll out the new products by 2017.

Philip Morris besides its cigarettes is also famous for its dividend payout. The company has a forward yield of 3.7% and the yield in the next quarter in expected to increase by 10%. The consistent payout and growth in the dividend payouts has given the brand a reputation of a regular dividend payer. Since there are currently no foreseeable threats the top-line or bottom-line of the company, we expect the dividend to continue in the coming years.

To add to the delight of its investors, Philip Morris announced a share repurchase program worth $18 billion which is to be carried out over the next three years.  It was also announced that the company would be looking to repurchase $6 billion in the current fiscal year. Share buybacks not only affect the price of the stock, but also highlights the amount of faith the board has in the company’s future.

The company shares its market space with Lorillard Inc. (NYSE: LO) We can see that Philip Morris has outperformed its peer along with the parent company, in terms of stock returns over the past five years.

Let’s take a look at the fundamentals of the parent company Altria and the competitor Lorillard.

Philip Morris appears to have a good mix of financial metrics. Analysts expect the EPS growth in the coming year to be around 11%. Overall the company has a stable top-line, and a hugely geographically diversified business. This diversification reduces the risks that a couple of badly performing economies could pose. The dividend yield with a regular payout in the past looks great. We do not say that other investment options aren’t attractive, but it is due to all the above mentioned reasons that we are compelled to give the stock a Foolish buy rating.

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