10-09-2013, 05:35 PM
I’ve been meaning to do a more detailed post on PM for a while now, and with the share price below $85 at the moment, it seems like a good time. By any ‘typical’ measure, I’ve got way too much tobacco in my portfolio right now. MO is slightly over 10 percent of my portfolio, and PM is right about 9 percent. But I really am addicted – I can’t stop myself from accumulating more shares at these prices. Here’s why:
First off, before you call me crazy for having 20 percent or more of my portfolio in tobacco stocks, read my views on a balanced portfolio here. I am still a long way from retirement, I believe that you should go with your best ideas, and I will strive for better balance through new purchases as I approach retirement. Also, consider that MO is easily in the running as the best performing stock of the last 100 years. MO and PM sell an addictive product that is simple to make and distribute with significant pricing flexibilty. These companies have huge cash flows and are, in my mind, about as close as it gets to printing money. Talk all you want about litigation, health consciousness, and onerous regulation and legislation. These companies have thrived in the face of these same headwinds for decades.
I discussed MO in a bit more detail here, so will focus now on PM. I think they are both great buys at today’s prices, but any new money I put into tobacco is going into PM. This is because I am planning to hold these shares for decades, and I think with the entire globe at its feet, PM might have an easier time sustaining earnings and dividend growth over that time frame.
Here is how PM stacks up on the primary dividend growth metrics that I watch:
Technically, PM’s streak of raising the dividend is only 6 years long. But it has only been an independent company for that long, since it was spun off from MO. It has raised the dividend like clockwork every year since it was spun off. And in my accounting, I give it credit for a longer streak because it was a part of MO prior to the spinoff. Annual dividend raises are in PM’s DNA and I have little doubt that healthy annual raises are a top priority.
At current prices, PM’s yield is a very solid 4.4 percent. You have to look back to about the middle of 2010 for the last time PM’s initial yield was this high. Relative to the income received, PM is cheaper right now than at any time since I’ve been buying it (I bought my first shares in July of 2012). In today’s environment, I’ll take 4.4 percent happily.
PM’s payout ratio is in the mid-to-high 60s somewhere, probably around 66 percent, by my math. For a company that generates the kind of cash that PM does, this is a completely healhty and sustainable payout ratio. Compare to MO’s target payout ratio of 80 percent.
PM’s P/E ratio is in the 15 to 17 range, depending on which earnings you are looking at. Looking at PM’s historical P/E, you could have bought it at lower multiples many times since the spinoff, but it is solidly in its range for the past couple couple of years and now that it has more of an established track record, it would not surprise me if this becomes its “new normal” P/E range.
PM sports a fine five-year earnings growth number in the 11 to 13 percent range. Probably the biggest caution with PM is that the earnings growth in the most recent two years has slowed considerably, to 6.8 percent last year and – if 2013 estimates are accurate – to about 4.8 percent this year. Projections for 2014, for whatever they are worth, are more rosy (about 10 percent).
Dividend growth is solid, with a five-year average dividend growth rate of over 12 percent. PM’s recent raise was a still-very-nice 10 percent.
I am not an expert at reading and interpreting balance sheets (far from it), but there has been a lot of discussion of PM’s increasing debt load of late. As I’ve said before, this does not concern me too much, given PM’s excellent cash flow. Moreover, I think the additional debt is being used to help fund PM’s consistently aggressive share buyback program. It seems reasonable to me to borrow at 1 or 2 percent to retire shares that you would have had to pay a 4 percent dividend on.
I’d love to hear others’ thoughts about PM. Am I on target, or am I overlooking important factors?
First off, before you call me crazy for having 20 percent or more of my portfolio in tobacco stocks, read my views on a balanced portfolio here. I am still a long way from retirement, I believe that you should go with your best ideas, and I will strive for better balance through new purchases as I approach retirement. Also, consider that MO is easily in the running as the best performing stock of the last 100 years. MO and PM sell an addictive product that is simple to make and distribute with significant pricing flexibilty. These companies have huge cash flows and are, in my mind, about as close as it gets to printing money. Talk all you want about litigation, health consciousness, and onerous regulation and legislation. These companies have thrived in the face of these same headwinds for decades.
I discussed MO in a bit more detail here, so will focus now on PM. I think they are both great buys at today’s prices, but any new money I put into tobacco is going into PM. This is because I am planning to hold these shares for decades, and I think with the entire globe at its feet, PM might have an easier time sustaining earnings and dividend growth over that time frame.
Here is how PM stacks up on the primary dividend growth metrics that I watch:
Technically, PM’s streak of raising the dividend is only 6 years long. But it has only been an independent company for that long, since it was spun off from MO. It has raised the dividend like clockwork every year since it was spun off. And in my accounting, I give it credit for a longer streak because it was a part of MO prior to the spinoff. Annual dividend raises are in PM’s DNA and I have little doubt that healthy annual raises are a top priority.
At current prices, PM’s yield is a very solid 4.4 percent. You have to look back to about the middle of 2010 for the last time PM’s initial yield was this high. Relative to the income received, PM is cheaper right now than at any time since I’ve been buying it (I bought my first shares in July of 2012). In today’s environment, I’ll take 4.4 percent happily.
PM’s payout ratio is in the mid-to-high 60s somewhere, probably around 66 percent, by my math. For a company that generates the kind of cash that PM does, this is a completely healhty and sustainable payout ratio. Compare to MO’s target payout ratio of 80 percent.
PM’s P/E ratio is in the 15 to 17 range, depending on which earnings you are looking at. Looking at PM’s historical P/E, you could have bought it at lower multiples many times since the spinoff, but it is solidly in its range for the past couple couple of years and now that it has more of an established track record, it would not surprise me if this becomes its “new normal” P/E range.
PM sports a fine five-year earnings growth number in the 11 to 13 percent range. Probably the biggest caution with PM is that the earnings growth in the most recent two years has slowed considerably, to 6.8 percent last year and – if 2013 estimates are accurate – to about 4.8 percent this year. Projections for 2014, for whatever they are worth, are more rosy (about 10 percent).
Dividend growth is solid, with a five-year average dividend growth rate of over 12 percent. PM’s recent raise was a still-very-nice 10 percent.
I am not an expert at reading and interpreting balance sheets (far from it), but there has been a lot of discussion of PM’s increasing debt load of late. As I’ve said before, this does not concern me too much, given PM’s excellent cash flow. Moreover, I think the additional debt is being used to help fund PM’s consistently aggressive share buyback program. It seems reasonable to me to borrow at 1 or 2 percent to retire shares that you would have had to pay a 4 percent dividend on.
I’d love to hear others’ thoughts about PM. Am I on target, or am I overlooking important factors?