Hold Philip Morris International
- By Alberto Abaterusso
Shares of tobacco giant Philip Morris International Inc. (PM) closed at $87 on Tuesday, down slightly from the prior day.
Over the past year through March 5, the stock lost 19%, sending the forward dividend yield up to 5.22%. This is based on a quarterly dividend of $1.14 per share.
Compared to the industry's median yield of 5% and the S&P 500 index's dividend yield of 1.93%, the return Philip Morris offers to shareholders is compelling. Yields are as of March 5.
Warning! GuruFocus has detected 3 Warning Sign with PM. Click here to check it out.
The intrinsic value of PM
Years of anti-smoking campaigns have not impacted the dividend the New York-based tobacco producer has regularly paid since 2008. In fact, it has steadily increased over the same period.
The sale of combustible products, which account for over 85% of Philip Morris' total revenue, is influenced by a low elasticity in the demand for cigarettes. Higher pricing, which was implemented in order to compensate for the reduction in sales volume, barely impacted the demand for tobacco.
Since tobacco products are addictive, quitting is extremely difficult. As a result, higher prices, health warnings on cigarette packages and health-related issues have not negatively affected the company's revenues, net income and cash flows.
This is demonstrated by the following figures.
In 2018, sales of the company's combustible products generated $25.53 billion out of total revenue of $29.63 billion. Revenue has grown at an average annual rate of 1.7% over the last five years.
Philip Morris also posted net income of $7.91 billion and produced $9.48 billion in cash flow. Over the last five years, net income has grown at an average annual rate of 2.8% and the operating cash flow has increased at a rate of 3.4%.
Philip Morris is returning 88% of its net income to shareholders through dividends.
Due to class-action lawsuits in Canada, the tobacco company has lowered its guidance on earnings per share to at least $5.28 versus a prior estimate of $5.37 and a consensus estimate of $5.4.
The stock is not cheap currently. The closing share price of $86.98 on Tuesday was above the 200, 100 and 50-day simple moving average lines. The price is also 34.5% above the 52-week low of $64.67 and 26.4% below the 52-week high of $109.90.
The price-earnings ratio is 17.12 versus an industry median of 17.38 and the price-sales ratio is 4.56 compared to an industry median of 2.66.
According to the Peter Lynch chart, Philip Morris is a little overvalued.
However, holding shares of this tobacco giant is worthwhile. Therefore, I agree with 50% of Wall Street that recommends holding shares of Philip Morris International with an average target price of $88.94 per share.
Disclosure: I have no positions in any securities mentioned in this article.
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This article first appeared on GuruFocus.
Warning! GuruFocus has detected 3 Warning Sign with PM. Click here to check it out.
The intrinsic value of PM
