PM - Philip Morris International

[ourkid8]

This is my first time adding an investment idea and I would like to add PM as this is 17.36% of my portfolio and this position has performed exceedingly well.  It's not a value play at this price as I feel it is fully priced but if you plan on holding this investment for the long term you will do extremely well.

 

In 2008, Altria spun off Philip morris international so it can focus on the rest of the globe without worrying about all the lawsuits primarily focused in the USA.  PM has signed an exclusivity agreements with CNTC (China National Tobacco Corporation) who holds a monopoly of the Chinese cigarette market of 350 million smokers.  The sale figures from China is insignificant at this time as there are quotas of how much they can sell a year.  (The CEO said, it's not a demand issue but supply on their end)  Excluding China and USA, PM controls 28.1% of the cigarette market. (which it has been growing YoY)

 

PM owns 7 of the largest 15 cigarette brands including the number one brand worldwide which is Marlboro.  Marlboro outsells its next two closest competitor brands combined.  PM has the advantage that they can price significantly higher then inflation as this is a inelastic product. 

 

2011 year end results were unbelievable as they continue to fire on all cylinders to grow the business.  PM has seen a cigarette shipment volume increase +1.7% or .5% excluding acquisitions whereas most of their competitors are seeing volumes falling. 

 

PM continues to return the majority of their earnings to shareholders either via Acquisitions, Dividend or share repurchase program.  PM's dividend yield is 4% and just increased their dividend this year by 20%.  PM has a very large share repurchase program as they have spent $21.4 billion dollars since May 08' to retire 414.1 million shares at an average price of $51.57.  For 2012' they plan on spending $6 billion to repurchase it's own shares. 

 

PM has also consistently engaged in productivity and Cost savings programs as in 2011 they removed $250 million in costs and in 2012 they plan on removing an additional $300 million which will hit the bottom line. 

 

Major Threats,

 

1.  plain packaging is on the horizon in Australia and we will truly see if they will go ahead with it as all the cigarette companies are suing the government over their intellectual property. (brand)

2.  Governments around the world continuing to pass laws to reduce smoking

3. Irrational price increases

4.  Southern Europe is a concern due to high and rising unemployment

 

Thanks,

S

 

Edit:

I was not expecting the run-up in the stock this morning but I had no doubt they were going to beat earnings, exceed $300million in cost savings and raise guidance.  I would definitely wait for a pull-back before starting a position but this is a business you buy and retire off the dividend stream.

 

I just reviewed the Q4 presentation and FCF as a % of revenue, they are on top of their peer group at 38.4% and leading the tobacco sector.  I love this investment!

[ourkid8]

http://investors.pmi.com/phoenix.zhtml?c=146476&p=irol-newsArticle&ID=1704795&highlight=

 

PM just announced a 3 year $18 billion share repurchase program.  Since the spin, PM has returned but $40B through dividends and share repurchase.  This investment consistently outperforms the market and should continue to do so for the long term. 

[lessthaniv]

This is not an attempt to create a moral arguement but rather a simple statement about my views on this type of investment.

 

For me personally, I wouldn't be comfortable cashing in my monthly dividend cheques knowing that what I'm selling people is killing them. For decades, the industry has marketed its deadly and addictive products to children, deceived the public about the harmful effects of these products and aggressively opposed measures to reduce tobacco use through huge lobbying efforts. The centre for desease control has some good information. I've read the cost to health care in the US alone is on the order of $96B annually with another $97B in lost productivity.

 

I'll just never make it past that point. I'm a capitalist but I think there are plenty of good opportunities to invest in that add something positive to the world rather than subtract from it.

 

<IV

 

[FCharlie]

This is not an attempt to create a moral arguement but rather a simple statement about my views on this type of investment.

 

For me personally, I wouldn't be comfortable cashing in my monthly dividend cheques knowing that what I'm selling people is killing them. For decades, the industry has marketed its deadly and addictive products to children, deceived the public about the harmful effects of these products and aggressively opposed measures to reduce tobacco use through huge lobbying efforts. The centre for desease control has some good information. I've read the cost to health care in the US alone is on the order of $96B annually with another $97B in lost productivity.

 

I'll just never make it past that point. I'm a capitalist but I think there are plenty of good opportunities to invest in that add something positive to the world rather than subtract from it.

 

<IV

 

I think if one were to truly and objectively listen to PM's CEO speak, and the annual meeting is a perfect example, one would not hold the moral objection that I often hear people cite as a reason they will not own PM.

 

Tobacco has existed forever. If PM shut down all of it's factories tomorrow, NO ONE would quit. The reality is, PM is part of the legitimate industry, and without the legitimate industry, the black market takes over, which is far worse for users. The people who hate the industry appear very misguided to me.  That's my opinion.

 

From a financial standpoint, Philip Morris is perhaps the most well run business in the world. They have one of the highest ratios of free cash flow as a percentage of net revenue of all companies on earth. PM returns cash to shareholders at an astounding rate, and can run the business with virtually no need for retaining capital. A couple of years ago, spring 2010, PM was absolutely unloved. It was at the time, the best investment opportunity I knew of. Today, the business is exactly the same. The stock has doubled. I still think anyone who buys and holds PM will do very well over time. I just wish I could have another shot at the stock like I had in 2010.

[ERICOPOLY]

and without the legitimate industry, the black market takes over, which is far worse for users.

 

Would we have fewer tobacco users without advertising?

[Liberty]

and without the legitimate industry, the black market takes over, which is far worse for users.

 

Would we have fewer tobacco users without advertising?

 

And without the industry's distortion and suppression of scientific findings over the past half-century?

 

I get how it's a legitimate industry, and how it's hard to draw the line (what about a company that makes alcohol? what about a company that makes guns and cruise missiles?), but I guess we each have to make our choices. Buffett and Munger won't invest in cigarette companies, and neither will I.

[leftcoast]

This is not an attempt to create a moral arguement but rather a simple statement about my views on this type of investment.

 

For me personally, I wouldn't be comfortable cashing in my monthly dividend cheques knowing that what I'm selling people is killing them. For decades, the industry has marketed its deadly and addictive products to children, deceived the public about the harmful effects of these products and aggressively opposed measures to reduce tobacco use through huge lobbying efforts. The centre for desease control has some good information. I've read the cost to health care in the US alone is on the order of $96B annually with another $97B in lost productivity.

 

I'll just never make it past that point. I'm a capitalist but I think there are plenty of good opportunities to invest in that add something positive to the world rather than subtract from it.

 

<IV

 

I don't disagree with you, but it's a pretty slippery slope, figuring out where to draw the line with "ethical" investments. I wonder if literally everything you wrote about MO could also apply to KO, PEP, KFT, and MCD. Big oil companies have done some really atrocious stuff in foreign lands over the last century, and what about the lobbying they've done against climate change science? Boeing and Raytheon and General Dynamics sell weapon systems that are used to kill people, and they're not too picky about who they sell them to, as long as it's legal. Until 2 years ago, Google was helping the Chinese gov't censor the internet.

 

As you say, every individual has to figure out what they are uncomfortable with, and what they are willing to look past or rationalize away.

[bargainman]

And without the industry's distortion and suppression of scientific findings over the past half-century?

 

I get how it's a legitimate industry, and how it's hard to draw the line (what about a company that makes alcohol? what about a company that makes guns and cruise missiles?), but I guess we each have to make our choices. Buffett and Munger won't invest in cigarette companies, and neither will I.

 

Right but is that still going on?  One thing about tobacco is that it's now a known entity right?  Causes lung cancer period.  Everyone knows, it's on the warning labels, at least in the US (so PM International might not be as restricted?)  Plus advertising is severely restricted now.  Same with alcohol companies.  The worse ones now IMO are the sugar dealers claiming that taking in insane amount of sugar is not somehow horrible for the obesity epidemic that's going to rock our healthcare costs for decades.  That said, one day I tried putting in an order to pick up some PM and MO..  And I just couldn't press the 'send order' button..  Oh well.  That said I don't hold it against anyone who chooses to own them. 

[Liberty]

Right but is that still going on?  One thing about tobacco is that it's now a known entity right?  Causes lung cancer period.  Everyone knows, it's on the warning labels, at least in the US (so PM International might not be as restricted?)  Plus advertising is severely restricted now.  Same with alcohol companies.  The worse ones now IMO are the sugar dealers claiming that taking in insane amount of sugar is not somehow horrible for the obesity epidemic that's going to rock our healthcare costs for decades.  That said, one day I tried putting in an order to pick up some PM and MO..  And I just couldn't press the 'send order' button..  Oh well.  That said I don't hold it against anyone who chooses to own them.

 

I wonder if that's the case in places like China and Africa, though...

[rmitz]

And without the industry's distortion and suppression of scientific findings over the past half-century?

 

I get how it's a legitimate industry, and how it's hard to draw the line (what about a company that makes alcohol? what about a company that makes guns and cruise missiles?), but I guess we each have to make our choices. Buffett and Munger won't invest in cigarette companies, and neither will I.

 

Right but is that still going on?  One thing about tobacco is that it's now a known entity right?  Causes lung cancer period.  Everyone knows, it's on the warning labels, at least in the US (so PM International might not be as restricted?)  Plus advertising is severely restricted now.  Same with alcohol companies.  The worse ones now IMO are the sugar dealers claiming that taking in insane amount of sugar is not somehow horrible for the obesity epidemic that's going to rock our healthcare costs for decades.  That said, one day I tried putting in an order to pick up some PM and MO..  And I just couldn't press the 'send order' button..  Oh well.  That said I don't hold it against anyone who chooses to own them.

 

If I recall correctly, smoking in the US has been in decline for a number of years.  One just needs to walk around and see--smoking is now an aberration in most places, so that it's noticable, or even illegal.  In my overseas travels, this is absolutely NOT the case, and I believe from what I've seen it's due to the same strategies being followed overseas that used to work in the US.

[ourkid8]

The U.K. and New Zealand are among countries more likely to ban logos from cigarette packages after Australia approved the world’s first uniform-packaging law, officials and health researchers said.

 

The Australian law says cigarettes can only be sold in packaging with no company logos and with the same font for all brands on a dark brown background. Graphic health warnings will cover 90 percent of the back of the package and 70 percent of the front.

 

What would be the impact on Tobacco companies earnings with plain packaging? Would it reduce consumption rates or create a greater moat as individuals will gravitate towards the major brands? This would definitely increase illicit cigarette sales thus potentially further harming individuals along with tax revelues.  I feel they are definitely infringing on the companies ability to use trademarks. What's next, Budweisr? Coke? McDonalds? etc...

 

http://www.bloomberg.com/news/2012-08-15/australia-plain-pack-tobacco-law-may-spread-to-u-k-n-z-.html?cmpid=yhoo

[ERICOPOLY]

The U.K. and New Zealand are among countries more likely to ban logos from cigarette packages after Australia approved the world’s first uniform-packaging law, officials and health researchers said.

 

The Australian law says cigarettes can only be sold in packaging with no company logos and with the same font for all brands on a dark brown background. Graphic health warnings will cover 90 percent of the back of the package and 70 percent of the front.

 

What would be the impact on Tobacco companies earnings with plain packaging? Would it reduce consumption rates or create a greater moat as individuals will gravitate towards the major brands? This would definitely increase illicit cigarette sales thus potentially further harming individuals along with tax revelues.  I feel they are definitely infringing on the companies ability to use trademarks. What's next, Budweisr? Coke? McDonalds? etc...

 

http://www.bloomberg.com/news/2012-08-15/australia-plain-pack-tobacco-law-may-spread-to-u-k-n-z-.html?cmpid=yhoo

 

I often here of products completely blocked from the market when they are proven to cause cancer.

 

Not marketed in a plain package, but blocked entirely. 

 

Asbestos products in a plain package?

[petec]

The difference is that people don't want asbestos.  People demonstrably do want tobacco.

 

The oddity with plain packaging is that it might increase price competition and make tobacco much easier to afford.  If that makes it less cool and people use it less, great.  But if people just buy more then it's a spectacular own goal.

[ERICOPOLY]

The difference is that people don't want asbestos.  People demonstrably do want tobacco.

 

That is a difference, yes.  However the similarity that attracted the law's attention is that they are both unsafe. 

 

 

Another unsafe product that people want is cocaine.  One of the key reasons why it is dangerous is that it is addictive, as is tobacco.

 

 

 

[ERICOPOLY]

Another unsafe product that people want is also Alcohol.    It seems as though the government is a strong partner of Tobacco companies as they both rely on one another which is the same for Alcohol beverage companies.  Imagine removing the intellectual property of BUD, Heineken, Jonnie Walker black label? 

 

Some high level stats:

 

-17,941 people died in 2006 in alcohol-related collisions in the US

-40% of all traffic deaths are Alcohol related

- 275,000 were injured in alcohol-related accidents in 2003

 

The difference is that people don't want asbestos.  People demonstrably do want tobacco.

 

That is a difference, yes.  However the similarity that attracted the law's attention is that they are both unsafe. 

 

 

Another unsafe product that people want is cocaine.  One of the key reasons why it is dangerous is that it is addictive, as is tobacco.

 

 

 

 

I agree that there is a double standard, and I reason that smokers brought it on themselves by literally fouling the air that others have a right to enjoy. 

[ourkid8]

This is wonderful news but we all knew it was coming.  PM continues to consistently create shareholder value!!!

 

-Quarterly dividend increased by 85% since 2008 spin

-New $18B Share Repurchase Program

-Over $40B returned to shareholders in 2008 spin

 

http://finance.yahoo.com/news/philip-morris-international-inc-increases-142200454.html

 

The Board of Directors of Philip Morris International Inc. (NYSE Euronext Paris: PM) today increased the company’s regular quarterly dividend by 10.4%, to an annualized rate of $3.40 per share.

 

The new quarterly dividend of $0.85 per share, up from $0.77 per share, is payable on October 11, 2012, to stockholders of record as of September 27, 2012. The ex-dividend date is September 25, 2012.

 

Thanks,

S

[NormR]

Seems to me that PM isn't particularly cheap at the moment.  What's the bull case?

[ourkid8]

Hi NormR,

 

My purchase price is $45.19 so I bought this company at a significantly lower price then what it is currently trading.  I still do feel this is undervalued for the following reasons:

 

-Volumes are growing overall (The european economy will slowly heal thus improving volume loss in europe )

    -Total PMI - 1.8%

    -Asia - 5.4% growth

    -EEMA - 4.2% growth

    -Latin America / Canada - Flat (-0.1)

    -Europe - negative 5.8

-Pricing power (Able to raise prices every year in excess of inflation)

-margins are expanding and will continue to do so for the near future as PM leverages efficiencies across it's supply chain

-Significantly increased time to maturity and also reduced interest rates of their long-term debt portfolio with rates below their dividend yield!!!! (I hope they keep on issuing debt below their dividend yield and continue to repurchase!!!)

-$18B 3 year share repurchase program (since 2008 - reduced the float by over 20% at an average cost of $54/share)

-Continues to focus on returning cash to shareholders via Sharerepurchases and dividends and since 2008 has returned over $40B

-The kicker which is not accounted for is the fact they have exclusivity with CNTC.  China has 250million smokers and there will be a day they further open up the market to PM in which we will see very strong volume growth.  The CEO mentioned the issue in China is Supply, there is a huge demand waiting for Marlboro's but they are being restricted by how much they are allowed to sell.

-addictive product and once an individual is hooked, they hardly switch

-One thing I forgot to add, There might be a paradigm shift for the industry that will hopefully really boost volumes.  PM is developing 3 types of safe cigarettes (Heated-tobacco devices that use warmed tobacco to generate an aerosol, another one lit with traditional lighter and the final based on a chemical reaction that produces nicotine)  and management expect it to be released to the public in 2017!!! 

 

Overall, the best way to make money is find a company with an addictive growing product overall, with pricing power, with management dedicated to creating shareholder value and hold on for life!!!

 

Thanks,

S

[ourkid8]

If this was not the largest position in my portfolio, I would definitely be adding at the current price.  On top of the sell off, PM is also repurchasing $1.5B of stock per quarter thus significantly reducing the float which offsets any potential volume loss.  This is exactly the type of stock you buy and forget about for the very long-term while enjoying the growing dividend stream. 

 

I estimate a 10-15%+ compounded annual return for the  next 5+ years.  (7-10% off capital gains and 4-5% off dividends)

 

Thanks,

S

 

 

[soycapital]

If this was not the largest position in my portfolio, I would definitely be adding at the current price.  On top of the sell off, PM is also repurchasing $1.5B of stock per quarter thus significantly reducing the float which offsets any potential volume loss.  This is exactly the type of stock you buy and forget about for the very long-term while enjoying the growing dividend stream. 

 

I estimate a 10-15%+ compounded annual return for the  next 5+ years.  (7-10% off capital gains and 4-5% off dividends)

 

Thanks,

S

 

Yes if I only owned three stocks this would be one of them!

[ourkid8]

http://www.reuters.com/article/2013/01/11/philipmorris-brief-idUSWNAB00MI020130111?feedType=RSS&feedName=marketsNews&rpc=43

 

Since my last recommendation, we have had a 7% rise and a dividend payment is on the way.  Goldman has just added PM to it's conviction buy list with a target price of $103 (15% rise from the current price + a 4% yield)

 

Thanks,

S

[luck]

interesting idea.  as an ex-smoker, i'm with the folks who'd bail on this idea just because of negative physical effects.  if smoking increased happiness over the longterm, meaning the positive psychological effects over the long term outweighed the well-researched negative effects on the body i might reconsider - but i haven't seen any studies to this effect.

[bargainman]

Perhaps the fact that it reduces healthcare costs might be seen as a positive? Yes, I said 'reduces', and I'm not trying to be flippant or anything especially about something cancer causing.  Here's something worth reading:

 

http://www.nytimes.com/2008/02/05/health/05iht-obese.1.9748884.html

 

http://www.usatoday.com/news/health/2009-04-08-fda-tobacco-costs_N.htm

 

However, smokers die some 10 years earlier than nonsmokers, according to the CDC, and those premature deaths provide a savings to Medicare, Social Security, private pensions and other programs.

 

Vanderbilt University economist Kip Viscusi studied the net costs of smoking-related spending and savings and found that for every pack of cigarettes smoked, the country reaps a net cost savings of 32 cents.

[ourkid8]

http://finance.yahoo.com/news/philip-morris-international-inc-pmi-150500096.html

 

PM reported outstanding Q4 and Full year results! 

 

-Adjusted diluted earnings per share of $5.22, up by 7.0% versus $4.88 in 2011, or up by 11.7% excluding currency

-Cigarette shipment volume, excluding acquisitions, up by 1.3%  (Q4 volume is up 2.9%)

-Excluding currency and acquisitions, reported net revenues, excluding excise taxes, up by 5.6%

-Increased its regular quarterly dividend during the year by 10.4% to an annualized rate of $3.40 per common share

-Repurchased 74.9 million shares of its common stock for $6.5 billion (Q4 $2B shares repurchased)

-Exceeded 2012 gross productivity savings of $300 million (aiming for another $300 million in savings for 2013)

 

Tks,

S

[FCharlie]

When Philip Morris International separated from domestic Philip Morris in 2008, the market cap was $100 Billion.

 

 

Since then, PM has returned $50 billion to shareholders via dividends and share repurchases. They have 22% fewer shares outstanding and they have grown the dividend 85%.

 

For being such an incredible money machine, PM doesn't get enough credit, and to be completely honest, if I were forced to put 100% of my net worth in only one stock, this is it, without any hesitation.