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International, Inc. (NYSE: PM).
10 Reasons This Dividend Won’t Go Up in Smoke
When it comes to evaluating the safety of a dividend paying stock, the first thing we need to verify - given
the current economic slowdown - is demand for a company’s products. After all, a company needs a
steady stream of cash coming in to afford to pay it out to shareholders. So, the first three reasons,
understandably, pertain to Philip Morris’ rock-solid demand…
1. Recessions don’t matter. As you might suspect, addictive products tend to enjoy the steadiest
demand. In fact, based on empirical evidence out of Citi Investment Research, the last two recessions
“had no material effect on [cigarette] demand.” This go round should be no different.
2. Higher taxes are offset by population growth. As world governments contend with sagging
economies, they continue to turn to tax increases on cigarettes to meet budget obligations. And obviously
demand is not inelastic - consumers are sensitive to price changes. The World Health Organization
estimates for every 10% increase in price, demand slips 4% in mature markets and 8% in developing
markets. However, when you factor in population growth, the impact is almost cut in half. More importantly
for Philip Morris, its highest margin markets (accounting for 60% of revenues) come from the less
impacted mature markets. In other words, the company’s profits are extremely durable.
3. Emerging markets. The WHO estimates that 80% of the world’s 1.3 billion smokers live in developing
countries. Sales in emerging markets are increasing modestly compared to declining volumes in
developed markets. Philip Morris is uniquely positioned to capture the lion’s share of this growth. It owns
seven of the leading 15 international brands, including the hands down leader, Marlboro. It operates in
160 countries and already derives over 60% of sales from emerging markets. So it’s no surprise that total
volumes increased a steady 2.5% in 2008. And total sales, net of excise taxes, increased by 12.7% to
$25.7 billion. As management acknowledges, there’s no mistaking that, “This strong performance was
driven by emerging markets.”
Show Me the Money… to Pay the Dividend
Beyond steady demand, we also need to verify that cash isn’t being misspent and jeopardizing the stock
dividend payment. The next three reasons pertain to Philip Morris’ ability to pay its dividend indefinitely…
4. Ample free cash flow. In 2008, the company generated $6.8 billion in free cash flow, a year-over-year
increase of 52.7% thanks to solid sales growth, supply-chain optimization and other cost-cutting initiatives.
Best of all, this figure should keep climbing, as the company is only about halfway through its three-year,
$1.5 billion cost-reduction program.
5. Solid cash buffer. With $2.4 billion in the bank, Philip Morris is sitting on enough cash to cover two
quarters worth of dividends.
6. Minimal litigation and regulation risk. The 2008 spin-off from Altria eliminated the legal and
regulatory risks facing the domestic operations. In other words, we don’t have to worry about the
possibility of any adverse judgments requiring the company to pay enormous settlements, thereby
hindering its ability to pay the dividend in the short to intermediate term. Same goes for the newly passed
legislation granting the FDA regulatory control over the industry.
7. Credit is no concern. The bulk of the company’s debt was issued before the credit markets soured.
And it’s well laddered at “attractive interest rates,” so there’s no concern about interest costs skyrocketing
and cutting into dividend payments due to untimely refinancing. Should any emergencies arise, the
company can tap into its $6 billion in unused bank credit lines.
8. The payout ratio is conservative. Even after increasing the dividend by 17.4% in August, to $0.54
per quarter, the company’s still only paying out 61% of profits. So profits would need to drop dramatically
to pose an immediate threat to the current payout. The low ratio also leaves plenty of room to increase the
dividend.
A Good Measure of Subjective Value, Too
The final two reasons the company’s dividend is safe pertain to subjective factors, like management and
market predictions. As a result, they’re not significant on a standalone basis. But they do contribute
positively to the overall outlook for the stock…
9. Management pedigree and commitment. Remember, Philip Morris spun-off from Altria, which
increased its dividend in 39 out of the last 41 years. That history and “commitment to reward our
shareholders generously” is ingrained in Philip Morris’ management. And as the CFO reveals, if
maintaining that commitment “means that the payout ratio overshoots 65% [occasionally], so be it.”
10. Currency tailwinds. A strong dollar hurts results because the company is based in the United States,
yet records almost all of its sales in foreign markets. However, many experts (and yours truly) believe the
dollar is doomed, which will only magnify the company’s profitability.
In the end, the fundamentals above prove the most important thing as an income investor - the dividend’s
safe.
They also point to the prospects for steady share appreciation. After all, the stock’s trading cheaply, at
just 12 times earnings and management expects to increase earnings by 14% next year.
As CFO Hermann Waldemer explains, “We have excellent momentum going into 2009. Our market shares
are growing overall… And our share growth is accelerating [too].”
We’ll get proof when the company reports earnings July 23. But if we wait for the results, I’m afraid shares
will get away from us and diminish the yield.
At current prices, the stock pays a reliable 5% with strong prospects for prospects for appreciation. So
don’t miss out.
Good investing,
Louis Basenese
Original Article
10 Reasons This Dividend Won’t Go Up in Smoke
When it comes to evaluating the safety of a dividend paying stock, the first thing we need to verify - given
the current economic slowdown - is demand for a company’s products. After all, a company needs a
steady stream of cash coming in to afford to pay it out to shareholders. So, the first three reasons,
understandably, pertain to Philip Morris’ rock-solid demand…
1. Recessions don’t matter. As you might suspect, addictive products tend to enjoy the steadiest
demand. In fact, based on empirical evidence out of Citi Investment Research, the last two recessions
“had no material effect on [cigarette] demand.” This go round should be no different.
2. Higher taxes are offset by population growth. As world governments contend with sagging
economies, they continue to turn to tax increases on cigarettes to meet budget obligations. And obviously
demand is not inelastic - consumers are sensitive to price changes. The World Health Organization
estimates for every 10% increase in price, demand slips 4% in mature markets and 8% in developing
markets. However, when you factor in population growth, the impact is almost cut in half. More importantly
for Philip Morris, its highest margin markets (accounting for 60% of revenues) come from the less
impacted mature markets. In other words, the company’s profits are extremely durable.
3. Emerging markets. The WHO estimates that 80% of the world’s 1.3 billion smokers live in developing
countries. Sales in emerging markets are increasing modestly compared to declining volumes in
developed markets. Philip Morris is uniquely positioned to capture the lion’s share of this growth. It owns
seven of the leading 15 international brands, including the hands down leader, Marlboro. It operates in
160 countries and already derives over 60% of sales from emerging markets. So it’s no surprise that total
volumes increased a steady 2.5% in 2008. And total sales, net of excise taxes, increased by 12.7% to
$25.7 billion. As management acknowledges, there’s no mistaking that, “This strong performance was
driven by emerging markets.”
Show Me the Money… to Pay the Dividend
Beyond steady demand, we also need to verify that cash isn’t being misspent and jeopardizing the stock
dividend payment. The next three reasons pertain to Philip Morris’ ability to pay its dividend indefinitely…
4. Ample free cash flow. In 2008, the company generated $6.8 billion in free cash flow, a year-over-year
increase of 52.7% thanks to solid sales growth, supply-chain optimization and other cost-cutting initiatives.
Best of all, this figure should keep climbing, as the company is only about halfway through its three-year,
$1.5 billion cost-reduction program.
5. Solid cash buffer. With $2.4 billion in the bank, Philip Morris is sitting on enough cash to cover two
quarters worth of dividends.
6. Minimal litigation and regulation risk. The 2008 spin-off from Altria eliminated the legal and
regulatory risks facing the domestic operations. In other words, we don’t have to worry about the
possibility of any adverse judgments requiring the company to pay enormous settlements, thereby
hindering its ability to pay the dividend in the short to intermediate term. Same goes for the newly passed
legislation granting the FDA regulatory control over the industry.
7. Credit is no concern. The bulk of the company’s debt was issued before the credit markets soured.
And it’s well laddered at “attractive interest rates,” so there’s no concern about interest costs skyrocketing
and cutting into dividend payments due to untimely refinancing. Should any emergencies arise, the
company can tap into its $6 billion in unused bank credit lines.
8. The payout ratio is conservative. Even after increasing the dividend by 17.4% in August, to $0.54
per quarter, the company’s still only paying out 61% of profits. So profits would need to drop dramatically
to pose an immediate threat to the current payout. The low ratio also leaves plenty of room to increase the
dividend.
A Good Measure of Subjective Value, Too
The final two reasons the company’s dividend is safe pertain to subjective factors, like management and
market predictions. As a result, they’re not significant on a standalone basis. But they do contribute
positively to the overall outlook for the stock…
9. Management pedigree and commitment. Remember, Philip Morris spun-off from Altria, which
increased its dividend in 39 out of the last 41 years. That history and “commitment to reward our
shareholders generously” is ingrained in Philip Morris’ management. And as the CFO reveals, if
maintaining that commitment “means that the payout ratio overshoots 65% [occasionally], so be it.”
10. Currency tailwinds. A strong dollar hurts results because the company is based in the United States,
yet records almost all of its sales in foreign markets. However, many experts (and yours truly) believe the
dollar is doomed, which will only magnify the company’s profitability.
In the end, the fundamentals above prove the most important thing as an income investor - the dividend’s
safe.
They also point to the prospects for steady share appreciation. After all, the stock’s trading cheaply, at
just 12 times earnings and management expects to increase earnings by 14% next year.
As CFO Hermann Waldemer explains, “We have excellent momentum going into 2009. Our market shares
are growing overall… And our share growth is accelerating [too].”
We’ll get proof when the company reports earnings July 23. But if we wait for the results, I’m afraid shares
will get away from us and diminish the yield.
At current prices, the stock pays a reliable 5% with strong prospects for prospects for appreciation. So
don’t miss out.
Good investing,
Louis Basenese
Original Article
| Dividend Investing: Buy This Dividend Paying Stock Before July 23… by Louis Basenase, Investmentu.com, July 16, 2009 |
Last week, I provided my six-step strategy to avoid the dividend investing trap and
find stable, high-yield dividends. Today, the rubber hits the road…
If you’re looking for a dividend paying stock to bolster your income - one ideally
suited to weather the current economic mess - look no further than Philip Morris
find stable, high-yield dividends. Today, the rubber hits the road…
If you’re looking for a dividend paying stock to bolster your income - one ideally
suited to weather the current economic mess - look no further than Philip Morris
| InvestmentU.com is an impartial, no-nonsence investment advice website. Visit it at Investmentu.com. |
|
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