Recs

11

Is Philip Morris International the Right Stock to Retire With?

Now more than ever, a comfortable retirement depends on secure, stable investments. Unfortunately, the right stocks for retirement won't just fall into your lap. Let's figure out what makes a great retirement-oriented stock, then examine whether Philip Morris International (NYSE: PM  ) has what we're looking for.

The right stocks for retirees
With decades to go before you need to tap your investments, you can take greater risks, weighing the chance of big losses against the potential for mind-blowing returns. But as retirement approaches, you no longer have the luxury of waiting out a downturn.

Sure, you still want good returns, but you also need to manage your risk and protect yourself against bear markets, which can maul your finances at the worst possible time. The right stocks combine both of these elements in a single investment.

When scrutinizing a stock, retirees should look for:

  • Size. Most retirees would rather not take a flyer on unproven businesses. Bigger companies may lack their smaller counterparts' growth potential, but they do offer greater security.
  • Consistency. While many investors look for fast-growing companies, conservative investors want to see steady, consistent gains in revenue, free cash flow, and other key metrics. Slow growth won't make headlines, but it will help prevent the kind of ugly surprises that suddenly torpedo a stock's share price.
  • Stock stability. Conservative retirement investors prefer investments that move less dramatically than typical stocks, and they particularly want to avoid big losses. These investments will give up some gains during bull markets, but they won't fall as far or as fast during bear markets. Beta measures volatility, but we also want a track record of solid performance as well.
  • Valuation. No one can afford to pay too much for a stock, even if its prospects are good. Using normalized earnings multiples helps smooth out one-time effects, giving you a longer-term context.
  • Dividends. Most of all, retirees look for stocks that can provide income through dividends. Retirees want healthy payouts now and consistent dividend growth over time -- as long as it doesn't jeopardize the company's financial health.

With those factors in mind, let's take a closer look at Philip Morris International.

Factor

What We Want to See

Actual

Pass or Fail?

Size Market cap > $10 billion $123 billion Pass
Consistency Revenue growth > 0% in at least four of five past years 4 years Pass
  Free cash flow growth > 0% in at least four of past five years 4 years Pass
Stock stability Beta < 0.9 0.84 Pass
  Worst loss in past five years no greater than 20% (9.1%)* Pass
Valuation Normalized P/E < 18 18.85 Fail
Dividends Current yield > 2% 3.7% Pass
  5-year dividend growth > 10% 11.6%* Pass
  Streak of dividend increases >= 10 years 3 years Fail
  Payout ratio < 75% 60% Pass
       
  Total score   8 out of 10

Source: Capital IQ, a division of Standard and Poor's. *Over three years since 2008 spinoff. Total score = number of passes.

With a score of 8, Philip Morris International has a great combination of growth and dividend income that conservative investors love to see. The tobacco giant has the world at its fingers and isn't missing the big opportunity it has.

In 2008, Altria (NYSE: MO  ) spun off its international operations into Philip Morris International. By doing so, it pulled off a big coup: it fenced off its U.S. litigation risk within the new boundaries of the much smaller Altria, freeing its international unit to pursue global expansion without the potential for a big U.S.-based lawsuit leading to a devastating verdict against the entire company.

As a result, Philip Morris International faces far less stringent regulation in its emerging markets than Altria and U.S. peers Reynolds American (NYSE: RAI  ) and Lorillard (NYSE: LO  ) . Yet it has the strong stable of Philip Morris brands, including Marlboro, to promote around the world.

Philip Morris International doesn't have completely clear sailing, as foreign competition from British American Tobacco (AMEX: BTI  ) and others still exists. But with seven of the world's 15 top brands, Philip Morris International has a big lead.

With a good dividend yield and strong growth prospects, the only things keeping Philip Morris International from a perfect score are investors bidding up the shares and a too-short history as an independent entity to reach a 10-year dividend streak. Retirees and other conservative investors would be well advised to find a place for Philip Morris International in their retirement portfolios.

Keep searching
Finding exactly the right stock to retire with is a tough task, but it's not impossible. Searching for the best candidates will help improve your investing skills, and teach you how to separate the right stocks from the risky ones.

Add Philip Morris International to My Watchlist, which will aggregate our Foolish analysis on it and all your other stocks.

If you want to retire rich, you need to be confident that you've got the basics of your investment strategy down pat. See if you're on track by following the "13 Steps to Investing Foolishly."

Fool contributor Dan Caplinger doesn't own shares of the companies mentioned. The Motley Fool owns shares of Philip Morris International and Altria Group. Motley Fool newsletter services have recommended buying shares of Philip Morris International and writing puts on Lorillard. 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 Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 08, 2011, at 1:42 PM, 2112Brian wrote:

    I believe investing in PM is like investing in MO back in the 1950's. People might say that PM is to big to experience such growth, but I disagree. As an example you could say MO was a big company back in 1980. 10K invested in MO in 1980 would have grown to 2.5MM (with dividends reinvested).

    I am not an investing expert. Is my logic flawed?

  • Report this Comment On July 08, 2011, at 3:04 PM, hayfordpeirce wrote:

    No, your logic is perfect.

    I invested in PM in 1987 and only wish that I had done it in the 1960s....

    Twenty-four years later PM (now Altria and PMI as well as Kraft) is my main Cash Cow, contributing about 2/5 of my annual income. And the dividends have been growing every year, year after year after year. It varies, of course, from year to year, but I would imagine that over 24 years the dividends have increased on an average of 12% per year. And the rule of 72 tells us that with a 12% annual increase, an original number will double in only 6 years. (Divide 72 by 12.) That means that in 24 years $1 in dividends at the very start then became $2, then $4, then $8, then $16. So that if you were getting $1000 in annual dividends 24 years ago, today you would be getting $16,000.

    There are a couple of other companies that have performed almost as well as Big MO over the *long* run, but even they have run into trouble -- think GE....

  • Report this Comment On July 08, 2011, at 9:06 PM, mm5525 wrote:

    PM is by far my #1 holding, and I still own KFT, but I did dump all my MO about 2 years ago in favor of putting it all into PM post spinoff. This is a good article, but I also would add another feather in PM's cap not mentioned by the author = the $5 billion in annual buybacks, up from $4 billion per year the last few years. PM, to the author's credit, has only been a stand-alone company since March 2008, but they do raise the dividend in the 3Q every year. Recently PM per their last CC raised their guidance by $0.10 to $0.20, so given that 60% payout ratio, look for the dividend to increase by another nickel or so again this Fall. What makes PM like Big MO in the 50s is Asia IMO. There is so much growth in the Asia Pac region, a rapidly growing first-time middle class population buying cars for the first time, for example, in places like Singapore, Indonesia, and India. PM is also experiencing high growth rates in South America as well.

  • Report this Comment On July 09, 2011, at 8:37 AM, 2112Brian wrote:

    I think it is hard to compare GE with MO. When MO went through hard times several years ago (all the big lawsuits) MO not only kept paying its dividend but they raised it. This was the best thing that could have happened to shareholders. They got more shares at a low price. I think that stock was yielding 10% at a point. When GE went through tough times they cut their dividend. GE is such a big company with so many different divisions I just don't see how anyone can manage the business. I like the fact that MO and PM have one mission. Produce a product that costs pennies to make and sell it for $5 and pay shareholders a big dividend.

  • Report this Comment On July 09, 2011, at 11:27 AM, hayfordpeirce wrote:

    When I made my GE comment, I meant that for many, many years, it had a record similar to, or as good as, MO's. Beginning around 1974, for example, it raised its dividend for 44 consecutive years. Then, of course, as I said, it stumbled a couple of years ago. And I sold all of my GE. Pfizer had a similar record. I sold all of my Pfizer. The only other company that I know of that has done as well as MO is J&J -- which I still hold. 3M and Emerson Electric, Coke, Kimberly Clark, and a couple of others like that have also been very solid performers over the years. But, almost certainly, over the last 40 or 50 years MO has been the best.

Add your comment.

DocumentId: 1516827, ~/Articles/ArticleHandler.aspx, 7/24/2014 6:43:53 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Dan Caplinger
TMFGalagan

Dan Caplinger has been a contract writer for the Motley Fool since 2006. As the Fool's Director of Investment Planning, Dan oversees much of the personal-finance and investment-planning content published daily on Fool.com. With a background as an estate-planning attorney and independent financial consultant, Dan's articles are based on more than 20 years of experience from all angles of the financial world.

Today's Market

updated 9 hours ago Sponsored by:
DOW 17,086.63 -26.91 -0.16%
S&P 500 1,987.01 3.48 0.18%
NASD 4,473.70 17.68 0.40%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

7/23/2014 4:01 PM
PM $85.08 Down -0.30 -0.35%
Philip Morris Inte… CAPS Rating: ****
BTI $120.82 Up +0.46 +0.38%
British American T… CAPS Rating: *****
LO $60.48 Down -0.57 -0.93%
Lorillard, Inc. CAPS Rating: ****
MO $41.72 Down -0.21 -0.50%
Altria Group, Inc. CAPS Rating: ****
RAI $57.16 Down -1.00 -1.72%
Reynolds American,… CAPS Rating: ****

Advertisement