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Philip Morris (PM) Rewards Shareholders, Unveils New Buyback Plan

·4 min read

Philip Morris International Inc. PM has been committed to making shareholder-friendly moves, courtesy of its financial flexibility. Incidentally, the tobacco giant approved a new share buyback plan of up to $7 billion. The company also unveiled that it intends to spend $5-$7 billion over a period of three years, which is anticipated to begin after management’s second-quarter 2021 earnings call.

Concurrently, Philip Morris announced a quarterly dividend of $1.20 per share, which is payable on Jul 12, 2021, to stockholders of record as of Jun 25. Notably, the company has a dividend yield of 5.1% and a free cash flow yield of 6.3%. With an annual free cash flow return on investment of 56.3%, significantly ahead of the industry’s almost 18%, the dividend payment is likely to be sustainable.

We note that the company has returned nearly $115 billion to its shareholders via dividends and share buybacks since its spin-off in March 2008. Clearly, the company enjoys a healthy financial status, which allows it to keep rewarding shareholders. In fact, Philip Morris on its first-quarter earnings call stated that it has sufficient liquidity to manage the business. As of the end of the first quarter of 2021 (Mar 31, 2021), the company had cash and cash equivalents of $3,902 million. In the first quarter, Philip Morris’ operating cash flow amounted to $258 million.

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What Else to Know?

Philip Morris has been benefiting from its strong pricing power, which has aided its revenues and adjusted operating income even in the face of the unfavorable tax environment and declining cigarette volumes. Higher pricing variance was an upside to the company’s performance across most regions during the first quarter of 2021, wherein the top and bottom lines cruised past the Zacks Consensus Estimate and increased year over year. Favorable combustible pricing aided the company’s adjusted operating income margin, which rose 18.5% (on an organic basis).

Additionally, the company has been gaining from the popularity of reduced risk products (“RRPs”). Toward this end, the company’s IQOS, a smokeless cigarette, counts among one of the leading RRPs in the industry. Continued strength in IQOS acted as a significant upside during the first quarter of 2021, During the quarter, RRPs formed 28% of the company’s total net revenues. These next-generation devices are backed by substantial scientific insights and research. The company expects such advanced and high-quality products to aid adult smokers to switch from traditional cigarettes to smoke-free options.

In fact, total users of IQOS, as of the end of the first quarter, were estimated to be about 19.1 million, including roughly 14 million users who have shifted from smoking to IQOS. Management earlier noted that since the onset of the pandemic, the switch from smoking to RRPs has been trending positively. Strong growth in IQOS boosted revenues in the RRPs category, which increased 36.5% to $2,122 million in the first quarter. Moreover, heated tobacco unit shipment volumes of 21.7 billion units rose 29.9% year over year. The company expects consistent growth in the heated tobacco category and therefore, has been committed to expanding these products.

We believe that such upsides are likely to keep Philip Morris going amid hurdles like soft cigarette volumes as well as challenges in duty-free business due to travel-related uncertainties amid the pandemic. Shares of the Zacks Rank #3 (Hold) company have rallied 14.2% in the past three months compared with the industry’s growth of 8.7%.

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