These 3 Headwinds Are Currently Buffeting Philip Morris

These three headwinds are currently holding back Philip Morris' growth.

Mar 31, 2014 at 11:41AM

As the world's largest tobacco company, Philip Morris International (NYSE:PM) is sought out by investors for the defensive nature of its business and sizable dividend payout. However, at present there are three strong headwinds facing Philip Morris, holding back growth; although peers Altria Group (NYSE:MO), Reynolds American (NYSE:RAI), and Lorillard (NYSE:LO) do not seem to have similar problems.

Currency impacts will hit growth 
Philip Morris' biggest concern over the next year will be the impact of unfavorable currency effects on its earnings. Philip Morris must convert all of its earnings back to US dollars, so the company has always reported some kind of currency impact to earnings. But 2014 is likely to be tougher than usual.

Thanks in part to the declining value of currencies in several of the company's key growth markets, such as Russia and Turkey, Philip Morris' management is guiding for a $0.71 per share negative currency impact for 2014. Most of this weakness is expected to stem from emerging markets, which will account for $0.45 per share of weakness; the weak yen will impact earnings by $0.20 per share, and other currencies will impact earnings by $0.06. These figures were compiled before the recent Russian crisis, so the final currency impact on full-year 2014 results is likely to be worse than the figures above.

Just to put these figures into some perspective, Philip Morris reported earnings per share of $5.76 for 2014, before the impact of currency. In comparison, Philip Morris peers Altria, Reynolds, and Lorillard have no currency exposure, so investors do not need to worry about instability within developing nations denting their dividend income.

A longer-term headwind that Philip Morris is facing is the management of its debt. You see, Philip Morris has borrowed more than it can afford in recent years. This is no secret, as the company acknowledged this fact at the Morgan Stanley consumer-goods conference in November.

As a result, after the completion of the company's current $18 billion share buyback, Philip Morris' management has stated that the company will reduce its buybacks to a "sustainable level" in an attempt to reduce debt. Management stated that a "sustainable level" was approximately the value of free cash flow after the deduction of dividends every year.

Still, what is of concern for shareholders now is figuring out how much cash Philip Morris can return to investors if it is not borrowing heavily and keeping its buybacks at a "sustainable level." Well, using data supplied by Morningstar, Philip Morris' free cash flow during 2013 was $9 billion, and dividends for the period cost $5.7 billion; so that leaves $3.3 billion for buybacks...or debt repayments.

Once again, all of Philip Morris' domestic peers appear to be in a more secure financial position than the tobacco behemoth. Indeed, according to Morningstar, at year-end 2013 Philip Morris had a debt-to-EBITDA, or earnings before interest, taxes, depreciation, and amortization, ratio of 1.8 times. Altria, Reynolds, and Lorillard had net debt-to-EBITDA ratios of 1.4, 1, and 1 times, respectively.

Illegal tobacco
Philip Morris has been fighting the rise of the illegal cigarette trade for some time. However, the recent drive by developed nations to introduce laws that prohibit the sale of cigarettes in branded packaging has made it much easier for the illegal market to operate. The full extent of this has recently been revealed within Australia, the first country to introduce these laws. A study by accounting firm KPMG found that in the one year that these regulations have been in place, illicit tobacco sales have increased by 1.5% to 13.3% of total shipments, while consumption of tobacco has not changed.

Along with plain packaging, the Australian government hiked excise taxes on cigarettes to the point that taxes now comprise around 63% of the price for a pack of cigarettes. In Australia, a single pack of 20 Philip Morris Marlboro cigarettes sells for around US $14, versus $1 in Vietnam and $2.30 in China; as you can imagine, this is not helping the battle against the illicit tobacco trade.

According to a recent report entitled "Asia-11: Illicit Tobacco Indicator 2012," an international study compiled by the International Tax and Investment Center and Oxford Economics, the volume of illicit cigarettes being smoked within developing countries is on the rise. For example, it is estimated that within many Asian markets, key regions of growth for tobacco majors, up to one-third of cigarettes are illicit.

While the issue of illegal tobacco is not limited to Philip Morris, the company's US peers are less exposed. Indeed, although it is suspected that 56.9% of all the cigarettes smoked within New York are illegally smuggled, they are usually smuggled from other states, keeping the profits in Altria's Lorillard's and Reynolds' pockets.

Foolish summary
All in all, these three headwinds are likely to impact Philip Morris' growth and investor returns over the next few years. Although as of yet, it is not possible to estimate how much the company will be affected. Still, for investors who are seeking a safer alternative, Philip Morris' US peers Altria, Reynolds, and Lorillard would make great alternatives.

Take advantage of this little-known government tax rule
Recent tax increases have affected nearly every American taxpayer. But with the right planning, you can take steps to take control of your taxes and potentially even lower your tax bill. In our brand-new special report "The IRS Is Daring You to Make This Investment Now!," you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Rupert Hargreaves owns shares of Altria Group. The Motley Fool owns shares of Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.


Compare Brokers