Tobacco companies have long been known for their legacy of offering rich dividends. Philip Morris International (PM, Financial) is one such company. It is the leading international tobacco company, with six of the world's top 15 international brands, including Marlboro, the number one cigarette brand worldwide. PM's products are sold in more than 200 markets. In 2014, the company held an estimated 15.6% share of the total international cigarette market outside of the U.S., or 28.6% excluding the People's Republic of China and the U.S.
It has the industry’s strongest and most diverse brand portfolio, led by Marlboro and L&M, the third most popular brand. Marlboro’s volume outside the United States was 291.1 billion cigarettes which makes it bigger than the next two largest brands combined.
Since 2009, Philip Morris International and Swedish Match AB have operated a joint venture company that has commercialized smokeless tobacco products, outside of Scandinavia and the United States. Through this joint venture company, PM sells smokeless tobacco products, including Swedish snus. PM’s brand portfolio includes a variety of blends and styles across 150 distinct brands and more than 1,900 variants.
Strong second quarter
- Reported diluted earnings per share was $1.21 (which increased by $0.04 or 3.4% versus $1.17 in the prior year quarter).
- Adjusted diluted earnings per share decreased by $0.20 or 14.2% and were $1.21.
- Cigarette shipment volume decreased by 1.4% and was 219.8 billion units.
- Reported net revenues, excluding excise taxes decreased by 12.0% and were $6.9 billion.
- Reported operating companies income increased by 0.6% and was $3.0 billion.
- Adjusted operating companies income was $3.0 billion, and decreased by 13.7%.
2015 projections
- Diluted EPS to be in a range of $4.32 to $4.42.
- On an adjusted basis, diluted EPS are projected to increase in the range of 9% to 11%.
- It anticipates that its currency-neutral 2015 full-year adjusted diluted EPS growth rate will be towards the upper end of its projected range of 9% to 11%.
Dividends and share repurchase program
During the quarter, PM declared a regular quarterly dividend of $1.00, representing an annualized rate of $4.00 per common share. Since its spinoff in March 2008, PM has increased its regular quarterly dividend by 117.4% from the initial annualized rate of $1.84 per common share. PM did not make any share repurchases in the first six months of 2015.
(Source: Company’s Website)
Factors that contributed to the second quarter success
- Strong business momentum.
- Organic volume trends.
- Market share growth.
- Robust pricing.
- Strong business fundamentals.
Future prospects
The company has good potential in the near future since it has created a niche for itself in the ecigs industry. PM is taking continual steps to improve its market position. It is concentrating on building up a solid international presence. Regular price hikes are going to add to its earnings in the future.
In 2015, the company has decided to enhance production processes and make improvements in the supply chain management. It is also initiating in cost curtailment efforts. The company is going to launch iQOS heated cigarette products in the second half of 2015. It will start in Italy and Japan. This variant is less harmful than the traditional ones. It is a smokeless hybrid cigarette. It resembles a second generation vaporizer.
Agreement with Altria
PM recently extended the strategic partnership with the Altria Group (MO, Financial) (signed in 2013) to develop the next generation of evapor products for commercialization in the United States by Altria and in markets outside the United States by PM. The collaboration between PMI and Altria in this endeavor is enabled by exclusive technology cross licenses and technical information sharing. The Joint Research, Development and Technology Sharing Agreement also provides for cooperation between PM and Altria on scientific assessment, regulatory engagement and approval related to e-vapor products.
Certain hiccups
- Currency headwinds.
- Declining tobacco volumes.
- Increasing regulatory control.
Positive outlook
PM is currently working on mitigating its currency headwinds. This year it was named as the top employer in Europe for the third consecutive year. It is one of 27 companies who were contenting for this title. Employing more than 82,000 people across the world, PM is known for incorporating strong reward programs and robust training and development programs. It has good employee appraisal programs in place.
Potential harm reduction
For more than a decade, PM has dedicated significant resources to the development and scientific assessment of non-combustible alternatives to cigarettes (also referred to as Reduced-Risk Products [RRPs]). Between 2008 and 2014, PM has invested over $2 billion in fundamental research, product development, scientific substantiation and adult smoker understanding. It assembled a team of more than 300 world-class scientists and engineers from 29 different disciplines, including materials science, consumer electronics, clinical science and systems toxicology. The team contributing to developing these products also includes an extensive global network of research and technology partners.
On a concluding note
It is a dividend aristocrat. Despite hailing from an unhealthy industry, this company has a huge customer base. This company is known for becoming investors’ staple. It competes with premium brands and boasts of higher margins than most of them. Many have thought that the cigarette industry is a sunset industry because of the social stigmatization attached to it. But there is a silver lining to it since an increasing number of people are moving towards ecigarettes. Out of the global $169 billion tobacco industry, about $6 billion comes from ecigs. The U.S. is the largest ecig market worth $1.7 billion as of 2014. This company has plenty of room for growth and to offer to its shareholders.
PM is a strong company, but since the tobacco industry is currently facing a lot of headwinds, this company has to overcome a lot of obstacles. But there is good news. Since the company is focusing on international markets, it does not have to comply with a lot of restrictions as because the U.S. is mostly posing these regulations to the tobacco companies.
The company reinforced a great start with solid second quarter results. While currency headwinds remain stubbornly high, the company is ever focused on the prudent management of cash flow. It is committed to returning around 100% of free cash flow to shareholders.
I am bullish about this company since I perceive that the company has achieved notable progress in the second quarter of 2015. In spite of hailing from a challenging industry, PM is making aggressive efforts to gain a solid position. The company is already gaining momentum in key market regions. PM is one of the very few companies that provide high dividends at great price.
