What’s So Appealing About Philip Morris International (NYSE:PM)?

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By Mark Michaels on August 26, 2014 Company

Philip Morris International (NYSE:PM) is one of those companies that investors are guaranteed to get a good deal on if they buy now. The company generally reports upward marching profits, with the exception of recent quarters which have flat lined due to problems in Russia and the Philippines.

During the course of the past 5 years, Philip Morris International has seen profits grow at 9 percent each year. However, the profits have been declining in their growth rate since two years ago, when the company posted profits of $5.17 and profits of $5.26 the next year in 2013. This pace of growth stagnated the company into the same growth range for the rest of 2014.

This decline in the growth rate of earnings has generated a source of opportunity for investors, especially when comparing these figures to those of the market as a whole. At Friday’s close last week, the S&P 500 as a whole traded at 19.72 times its earnings. Meanwhile, Philip Morris International trades at a price of $84.34, while its profits are $5.26, making its valuation 16.03 times its profits. This discount is most likely due to the company’s struggle in increasing its earnings over the past two years. Additionally, it is very likely that if investors wait for the return to earnings increase before buying into the stock, they will not be able to get the stock at a cheaper price.

But how can we be sure that the company’s earnings growth will bounce back to normal rates? First of all, the company is increasing revenues in the 4.5 percent range, even though the volume difficulties in Russia have been pushing that number down. Given the disadvantageous circumstances, the company’s reports seem to have a bright future ahead.

Additionally, the company’s flagship brand “Marlboro” has the ability to gain market share, which is a good sign for investors. Marlboro has grown its market share from 18.6 percent to 19 percent in the European Union. As for the Middle East, Africa, and Eastern Europe region, the brand has increased its market share from 7 percent to 7.1 percent. Its market in Asia also saw a similar growth in market share of 0.1 percent. Marlboro’s market share in Latin America and Canada grew from 14.6 percent to 15 percent. Currently, Philip Morris International is delivering roughly 300 billion units of Marlboro all over the globe, and its growing share of the market will show itself in the form of greater earnings per share over the course of the next few years.

Another opportunity for investors lies in the fact that earnings per share have been aversely affected to the price of $0.34 a share. Based on constant currency, that would make the company’s profits be about $5.60 per share. This means that the basics of the company are better than indicated because of the current loss in value when the company’s profits are converted back into dollars. When the dollar weakens against currencies around the world, the opposite effect will occur – Phillip Morris International’s profits will seem to grow at a much faster rate than it actually is in reality.

The company also provides investors with a starting dividend yield, offering investors the opportunity to gain high current income while owning a stock that is not over priced. The growth rate of the five year dividend is 26.5 percent, but that number is inflated because the company had only a 30 percent payout ratio after its spin off from Altria. Part of that high figure is also due to the cigarette manufacturer’s increase in payout ratio from 30 percent to 65 percent, then to 70 percent. It is very likely that the dividend growth will average out to be between 8 percent and 10 percent in the near future, and reflect Philip Morris’s growth rate for long term earnings per share.

Conclusion

Philip Morris International is an appealing dividend stock to purchase because it is unlike many of its peer companies in the dividend growth world in that its shares are not overpriced. The reasonable price point is due to the lack of earnings growth over the last two years, and it is why the stock is a fair deal for shareholders today. If investors were to wait a year for earnings per share to resume its upwards growth, then the chance to buy into the stock at just 16 times its current earnings may pass.