When a company pays a juicy dividend and its stock is trading at an attractive price, it can hard for a Dividend Growth Investing proponent to resist.
Throw in a long history as a high-quality business, as well the possibility of a most interesting future … and I found Philip Morris International (PM) to be irresistible, indeed.
On Tuesday, Sept. 10, I added the world’s largest transnational tobacco company to DTA’s Income Builder Portfolio, executing a purchase order on Daily Trade Alert’s behalf for 13 shares at $73.73 apiece. (The trade was carried out in two separate orders a few seconds apart, which happens occasionally.)
As I got ready to hit the buy button, I kept thinking back to the purchase we made about 15 months ago of AT&T (T) — another high-yielding company that I considered dirt cheap.
Meanwhile, our AT&T position has generated four dividend payments totaling $65, which has been reinvested to add another 2 shares to the portfolio.
The combination of the larger share total and the price gain has resulted in a 25% total return on our T position.
That’s three times the return we would have received had we bought an S&P 500 Index ETF that day — pretty darn good for a “boring income play.”
The obvious question might be: Why don’t we do that every time?
And the answer is: If we knew that we could always pick stocks that would experience 25% total return every 15 months and outperform the overall market by 200%, we’d be living on our own private island in the South Pacific.
Although I try to pay attention to valuation before I make every IBP selection, I also try to heed the words of one of history’s greatest investors …
So first and foremost, I focus on quality. If that means the Income Builder Portfolio is not getting a screaming bargain every time, I can live with that.
Sometimes, though, a company I consider worthy of IBP consideration is inexpensive and generates good income. I felt that way about AT&T back in July 2018, and I feel that way about Philip Morris today — which is why I made it the portfolio’s 27th position.
Smokin’ Dividends
There are many good reasons to consider PM, including what could be a very advantageous reunion with Altria (MO). I discussed all of that at length in my previous article: HERE.
Of course, for DGI portfolios such as the IBP, the generous and growing dividend is at or near the top of the list.
(Schwab.com)
Due partly to the company’s commitment to its dividend and partly to the price pullback, Philip Morris International is yielding 6.2% — just shy of its high mark since being spun off from MO in 2008.
As a result, PM immediately becomes the IBP’s No. 7 income-producer. Among companies we’ve only bought once since the portfolio’s inception 21 months ago, only AT&T is expected to bring in more annual income.
Simply Safe Dividends gives PM a 64 score, which is lower than I’d prefer but still well within the “Safe” zone, and the following graphic from McLean Capital Research shows the company’s free-cash flow covering its dividend.
Come mid-October, Philip Morris figures to deliver an $14.82 dividend into the portfolio; I say “figures to” because it’s quite possible that the company will announce its annual raise before then.
If we simply deal with what we know today, the $14.82 will buy about 2/10ths of a share through dividend reinvestment (as required by the IBP Business Plan).
Then, the new share total of 13.2 will generate a $15.05 dividend in January 2020 — and much more if the increase comes through. That income will buy still more PM, and that’s the way this portfolio gets built.
The dividend wild-card in future years: How will a re-merger with Altria affect the payout? Most observers think that while MO’s dividend could go down a little bit, PM’s actually could rise.
Analyze This!
I’m not the only one who is bullish on Philip Morris in this price range. Most of the 16 analysts surveyed by Reuters give PM either a Buy or Outperform rating.
Analysts at Ford Equity Research expect Philip Morris to “strongly outperform the market” over the next year or so.
Valuation Station
The analysts at Morningstar Investment Research Center agree with me that too many market observers are pessimistic about what the reunion of Altria could mean to Philip Morris.
They confidently put PM’s fair value at $102 — 38% higher than our purchase price — and assign a 5-star ranking, which puts it among the most undervalued stocks they cover. Add in the Wide Moat and Exemplary Stewardship ratings (yellow highlights), and one can see why Morningstar is so high on the company.
At about $81, CFRA’s fair value calculation for Philip Morris is lower, but it still makes this entry point look pretty nice.
A wealth of interesting valuation information can be found from the following FAST Graphs illustration.
The red-circled areas on the right show that the company’s P/E ratio is well below its historic norm; the purple circle at the end of the black line on the graph illustrates that, too. The red X’s indicate how nearly every time Philip Morris’ P/E ratio falls to the current level, it’s been a decent (or even excellent) buying opportunity.
Wrapping Things Up
I have owned Philip Morris in my personal portfolio since the spinoff from Altria, and it’s been a core position for about seven years now. My only holdings that produce more annual income: T and MO.
So obviously, I think PM is a company worth owning, and I am excited about the possibilities that a reunion with Altria can bring.
I would be delighted if Philip Morris’ performance within the Income Builder Portfolio matches what AT&T has done these last 15 months. Even if that doesn’t happen, however, I’m confident that the IBP will benefit from the dividends we receive and, long-term, from solid total return.
As always, this is not a recommendation to buy any stock; investors are strongly urged to conduct their own due diligence.
— Mike Nadel
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