Philip Morris Is Scaling Back Investor Returns

Philip Morris' management believe that the company should focus on debt reduction not buybacks in the future.

Jun 3, 2014 at 11:58AM

Philip Morris (NYSE:PM), recognized as one of the most profitable companies in the world, has long been known for its impressive shareholder returns.

Since the end of 2009, Philip Morris has returned around $44 billion to investors through both buybacks and dividends. This figure works out at around $24 per share, based on the number of shares in issue from the end of 2009.

A problem
There is a problem with this heavy-handed approach to investor returns. While Philip Morris has been accelerating returns recently, the company is now being forced to scale back its buyback plans as the company has been spending more than it can afford.

Meanwhile, Altria (NYSE:MO), Philip Morris' domestic peer, is now talking about ramping up buyback spending after years of lackluster buybacks despite impressive dividend payouts.

Management are cautious
The best way to describe Philip Morris' new found fiscal prudence is to take an excerpt from the company's presentation to the Consumer Analyst Group of New York Conference at the beginning of this year :

"...We spent $2.3 billion on these four business development initiatives. Last year we spent $6 billion on share repurchases and our outlay on dividends was $5.7 billion. As a result, on our cash outflow was $14 billion. Our free cash flow in 2013 increased by $990 million to $8.9 billion...This translated into net financing requirement of $5.1 billion ...our total debt last year by $4.8 billion to $27.7 billion..."

"...We're intent on maintaining our single A credit rating and recognize that we're approaching the high-end of ratio and supporting it... to scale back our share repurchase target to $4 billion in 2014. We are committed to share buyback and our operating corridor is defined on one side by the upper limit of our credit rating and on the other side by providing 100% of our free cash flow to our shareholders through dividend and share buyback. We intend to operate within this corridor in the future...."

It would seem as if Philip Morris intends to reduce its share buybacks in the future in order to maintain a stable credit rating.

Back in the U.S.
Philip Morris is one of the few companies that looks after its shareholders this well. Even after scaling back buybacks to around $4 billion per annum, the company will still be chucking out more cash than Altria is returning via dividends. Altria's cumulative dividend payout cost the company $3.6 billion for 2013, and $3.4 billion for 2012.

Altria's management is also somewhat against buybacks, instead favoring hefty dividend payouts. Altria has only spent a little under $2 billion on repurchases during the past two years. During the same period, the company has generated upwards of $8 billion in operating cash flow.

However, there are indications that the company could be gearing up for greater repurchases. On Altria's first quarter conference call, analyst Chris Gowe asked management if they planned to ramp up repurchases this year as free cash flow improved. Altria's management responded that:

"...our normal practice has been that most of the cash returned to shareholders come through our 80% dividend payout ratio but opportunistically we'll do some share repurchase. So additional share repurchase is sure to be a discussion topic here over the next several months...So, certainly use of cash for something, we'll be looking at over the next few months ..."

With those comments in mind, it would appear that Altria's management is contemplating bigger buyback plans. This is great news for shareholders who are already profiting from the company's hefty 4.7% dividend yield.

Foolish summary
After several years of spending more than it can afford on buybacks and dividends, Philip Morris has finally decided to reign in returns. Even though the company will be spending less on buybacks, it is still likely that the buybacks will continue to cost the company several billion per annum. 

On the other hand, Altria, a company reluctant to spend on buybacks, is considering a new, bigger buyback plan. That's great news for investors. 

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.

Rupert Hargreaves owns shares of Altria Group. 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.

A Financial Plan on an Index Card

Keeping it simple.

Aug 7, 2015 at 11:26AM

Two years ago, University of Chicago professor Harold Pollack wrote his entire financial plan on an index card.

It blew up. People loved the idea. Financial advice is often intentionally complicated. Obscurity lets advisors charge higher fees. But the most important parts are painfully simple. Here's how Pollack put it:

The card came out of chat I had regarding what I view as the financial industry's basic dilemma: The best investment advice fits on an index card. A commenter asked for the actual index card. Although I was originally speaking in metaphor, I grabbed a pen and one of my daughter's note cards, scribbled this out in maybe three minutes, snapped a picture with my iPhone, and the rest was history.

More advisors and investors caught onto the idea and started writing their own financial plans on a single index card.

I love the exercise, because it makes you think about what's important and forces you to be succinct.

So, here's my index-card financial plan:


Everything else is details. 

Something big just happened

I don't know about you, but I always pay attention when one of the best growth investors in the world gives me a stock tip. Motley Fool co-founder David Gardner (whose growth-stock newsletter was rated #1 in the world by The Wall Street Journal)* and his brother, Motley Fool CEO Tom Gardner, just revealed two brand new stock recommendations moments ago. Together, they've tripled the stock market's return over 12+ years. And while timing isn't everything, the history of Tom and David's stock picks shows that it pays to get in early on their ideas.

Click here to be among the first people to hear about David and Tom's newest stock recommendations.

*"Look Who's on Top Now" appeared in The Wall Street Journal which references Hulbert's rankings of the best performing stock picking newsletters over a 5-year period from 2008-2013.

Compare Brokers