Is Philip Morris A Buy At Current Levels?

Although it has had a rather muted start to the year, could Philip Morris deliver a strong performance through 2014?

May 27, 2014 at 10:45AM

 Philip Morris (NYSE:PM) has delivered a slightly disappointing performance thus far in 2014, with the manufacturer of Marlboro cigarettes down around 1%. This doesn't compare favorably to the S&P 500, which is up over 2% year-to-date. However, Philip Morris was further behind the wider index and has bounced back from lows of $75.39 in early February to reach the current price of $86.34, which is roughly in the middle of its 52-week range of $75.28-$95.60. With this in mind, is now the right time to buy shares in Philip Morris?

Drilling down into the first quarter results from Philip Morris
The most recent quarterly update (first quarter, released on April 17) was roughly in-line with expectations and contained few surprises, with the company delivering resilient and encouraging numbers. Negative currency impact, however, continues to have a significant effect on earnings per share (EPS) figures. With it included, Philip Morris saw EPS fall by 7.8% when compared to the first quarter of 2013, while excluding it equated to a rise of 4.7% versus the same time period in 2013. This shows that a glance at EPS figures can be misleading, with the impact of currency clouding the real performance of the company during the period.

Furthermore, excluding currency impact from forecasts means adjusted EPS is set to be between 6% and 8% higher in 2014 than it was in 2013 (when it was $5.40). This is highly encouraging and shows that Philip Morris is, I believe, pursuing the right strategy through which to combat volume declines that are affecting the global tobacco industry. For instance, it is on course to achieve a productivity and cost savings target of $300 million this year, while the vast share buyback program continues apace – Philip Morris expects to spend $4 billion this year on the purchase of its own shares.

While both of these actions will do little to stimulate the top-line, they are a prudent response to the decline in cigarette volumes that continues to affect Philip Morris and its peers. For example, the company reported cigarette shipment volumes of 196 billion units for the quarter, which is down 4.4% versus the first quarter of 2013. Therefore, cost saving is a sensible response to this problem, while a share buyback is a useful means of the company utilizing its strong cash flow when shares continue to offer good value (more on that later).

Let's take a look at the first quarter performance of two of Philip Morris' peers
The first quarter was also encouraging for peers Altria (NYSE:MO) and Reynolds American (NYSE:RAI). While Reynolds American reported flat adjusted EPS numbers for the quarter (versus the first quarter of 2013), it reaffirmed guidance for the full-year where it expects adjusted EPS to improve by between 3.5% and 8.2% versus 2013. This is an impressive target and is backed up by continued strength from its key brands – for example growth brands Camel and Pall Mall increased their strong performance and increased their combined share of the market by 0.7% versus the first quarter of 2013, so that it now stands at 19.4%. Such strength allowed Reynolds to increase dividends per share by 6.3%, which equates to a forward annual yield of 4.7% and compares favorably to Philip Morris' forward yield of 4.4%.

Meanwhile, Altria's first quarter results saw a reaffirmation of adjusted forecast EPS numbers for the full-year, with the company on target to deliver bottom-line growth of between 6% and 9% compared to 2013. This growth rate is within the company's sights as a result of it anticipating an improved performance during the second half of the year due to factors such as lower fourth quarter costs in the smokeable products segment (because of end of quota buyout payments), as well as a substantially lower tax rate in the fourth quarter (because of the effect of Altria's debt tender offer in 2013). Furthermore, Altria expects to retain a dividend payout ratio target of 80%, which is highly encouraging for income-seeking investors, and means that shares currently trade on a forward dividend yield of 4.7%.

Strong performance plus an attractive valuation equals a 'buy'
Having delivered encouraging updates for the first quarter of the year, it is clear that Altria, Reynolds American and Philip Morris are implementing prudent policies with which to counter volume pressures that are a feature of the global tobacco market. With regards to the original question of if Philip Morris is a buy at these levels, the first quarter update provides evidence of the company's strong performance and resilience during a challenging period for the sector.

In addition, shares in Philip Morris also appear to offer good value for money at current levels. Their forward price to earnings (P/E) ratio of 15.2 compares favorably to the S&P 500's forward P/E of 15.8, while a forward dividend yield of 4.4% is roughly twice that of the S&P 500. Although shares have not made a great start to 2014, they seem to have the potential, in my view, to deliver strong performance through the rest of the year and, as such, they appear to be a 'buy' at current levels.

Top dividend stocks for the next decade
The smartest investors know that dividend stocks simply crush their non-dividend paying counterparts over the long term. That’s beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor’s portfolio. To see our free report on these stocks, just click here now.

Robert Stephens has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

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.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

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. It's also featured on several dozen 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 ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers