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Why I am Not Selling MO Yet

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By BuildMWell
March 1, 2004

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Several days ago I was looking at my portfolio and I was thinking about selling maybe a third of my Philip Morris position. I know the stock is approaching new highs and that worries me. However, MO's stock price isn't even close to the compound growth rate curves that I use to define the long-term performance capability of all great businesses. Historically, MO has been able to grow at well over a CAGR of 15%...it has been above 19% on occasion but I do not expect that again. In all honesty, the business has grown too large and people are trying to stop using the company's best profit margin products. That is a sure reason to suspect that the future growth rates will not match our past greatness. But, 15% is still real good...don't get me wrong here.

Anyway, today the rate of growth is sitting squarely on about my 13.5% CAGR curve with the dividend add another 5% which is a really very nice total return. You may recall that I have consistently talked about a 17% to 18% total return as the optimum for MO. Thus, I am getting antsy about the stock price. Of course, we can expect a dividend increase in a few months too...that makes the present situation look slightly scarier! I mean, how good can this deal get for us?

Conversely, if the stock were to rise to the 15% CAGR curve by year-end, the price will be at $85/share and the dividend will be at about 3.2%. That is still showing a total return of 18.2% which MO has repeatedly done in the past when at its 15% CAGR. So, why can't it do this again?

Anyway, if the stock were to move to $85/share by year's end that return would be almost 50% more for us MO longs to pocket plus the 5% dividend. Greed and Fear...Fear and Greed. They are working on me for sure.

But then, Greed took over and I knew exactly what to do. I will not sell yet! I was confusing myself by thinking too much! Often, doing nothing is the best policy.

Here is the bottom line. I have a home equity loan at 3.75%. That is guaranteed for at least a year. If the interest rate goes up, I will sell some equities and pay it off. In the meantime, I have some cheap money for investments. Philip Morris is yielding 5% at today's price...why would I sell MO to pay off my loan? It would be stupid!

If interest rates start up, I can always sell MO or some other stocks to pay off my loan. But, why would interest rates go up? Banks can borrow from the Fed at 1%! They are paying under 1% on savings. Heck, they are happy as pigs in slop loaning me money at 3.75%! That interest is tax deductible to boot.

If MO's price drops, the yield will be over 5%...plus the stock will become a better buy than it is today and people are buying it today and the price is rising! Why would I sell? Aren't the buyers seeing the same interest situation that I am seeing? So, as long as the Fed holds tight, I am holding tight on MO! When the dividend yield drops to 4%, I may part with some MO; that will be at about $65 to $68/share...and that is totally reasonable. In the meantime, I am real happy and will sleep soundly with my investment...it is making me money every minute that I own the stock...why would I sell? Heck, I feel like a bank!

By the way Merrybird, that is actually why I think the stock is going up in price. People are not stupid. They see exactly what you and I see. We just saw it sooner than they did. That is why we like Philip Morris. And, since we are not selling, there has to be more demand for the stock.

If that silly case in Illinois were to be tossed out as it should be, we could see $70/share lots quicker than we think. Remember, because of that case the gurus were predicting the bankruptcy of Philip Morris just a year ago...today the stock is at all time highs! Surely that shows the reliability of the guru's abilities. I have decided to trust my own abilities. I am not selling yet.


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