Philip Morris: Still Smokin'

07/01/2014 9:00 am EST


Genia Turanova

Editor, Leeb Income Performance

As the economic recovery strengthens, one type of play comes to the investment forefront: quality, defensive stocks offering stable businesses, strong balance sheets, and good cash generation, suggests Genia Turanova, editor of Leeb Income Performance.

One such stock is Philip Morris International (PM). A laggard last year, it has significantly outperformed the market over the past three months, and yet still remains less expensive on a p/e basis than the general market.

Is it time for the stock to shine? The latest quarterly results (for the first quarter of 2014) were not too impressive, as reported diluted earnings per share of $1.18 were down by 7.8%, with revenues down 8.8%. Cigarette shipments fell 4.4%.

That said, the results were better than expected. Plus, the company revised its 2014 forecast of diluted earnings per share to a range of $5.09 to $5.14; excluding unfavorable current impact, reported diluted earnings per share are projected to rise by about 6 to 8%.

This came on the heels of the solid overall performance in 2013, achieved despite the challenging environment. While cigarette volume declined by 5.1%, net revenues and adjusted EPS grew 1.9% and 10%, respectively, for the year.

The negative industry trends have been moderating, and Philip Morris continues to execute well, building on the strength of its brands and the ensuing strong pricing power. Another positive that will remain a future factor is ongoing margin improvement based on cost and productivity initiates.

Philip Morris has successfully completed a $300 million annual productivity and savings program and hopes to achieve a similar level of savings in 2014.

Plus, the company is focused on rewarding shareholders through dividends and share repurchases, while remaining determined to maintain its strong single A credit rating. The company has maintained its dividend target payout ratio of 65% and its current yield is 4.4%.

Since May 2008, when Philip Morris initiated its share repurchase program, the company spent an aggregate of $351 billion to buy 71.6 million shares at an average price of $61.41—27% of the shares outstanding at the time of the sell-off in March 2008.

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