Cigarettes — to calm down your portfolio (Philip Morris)?
A word of Caution!
You should not buy a warrant / invest your money unless you are prepared to sustain a total loss of the money you have invested plus any commission or other transaction charges.
What am I looking for
A time of optimistic excitement and a massive rally started immediately after the scary dropdown of markets in 2020 when the pandamic hit all of us. Many actions have been taken which nobody could have seen just days or weeks before COVID hit.
If you followed the schoolbook and you established a well diversified portfolio — the dropdown might have been just a 6 month hickup and your portfolio was back to where it was somewhen in august/september. If you invested heavily in tech — you saw huge gains in a very short time.
But what happened since wasn’t less scary for investors. Big Tech started to stumble, story stocks got crushed, former pandemic winners lost their gains and dropped below their pre-pandamic levels.
That’s it — right? … not at all — troubles haven’t even started at that point when the market decided that high PE stocks are not really the way to go. Looking back, I wish we’d think about which economic cycle is waiting for us and how to prepare for it.
COVID still not gone, inflation doesn’t seem to be transient, war in europe — frick!
So what I’m looking for as an investor aren’t the next tenbaggers and not the constant growers with chances to make a jump. The shakeups we’re currently facing are simply too unpredictable and I already have a couple of “bets” in my portfolio. What I’m looking for is something boring — something which generates cashflow and doesn’t need too much attention. Maybe Philip Morris is such a stock — let’s have a quick look.
Who’s that
Description (Yahoo! Profile)
Philip Morris International Inc., through its subsidiaries, manufactures and sells cigarettes, other nicotine-containing products, smoke-free products, and related electronic devices and accessories. The company offers IQOS smoke-free products, including heated tobacco and nicotine-containing vapor products under the HEETS, HEETS Creations, HEETS Dimensions, HEETS Marlboro, HEETS FROM MARLBORO, Marlboro Dimensions, Marlboro HeatSticks, and Parliament HeatSticks brands, as well as under the Fiit and Miix licensed brands. It also sells its products under the Marlboro, Parliament, Bond Street, Chesterfield, L&M, Lark, and Philip Morris brands. In addition, the company owns various cigarette brands, such as Dji Sam Soe, Sampoerna A, and Sampoerna U in Indonesia; and Fortune and Jackpot in the Philippines. It markets and sells its products in the European Union, Eastern Europe, the Middle East, Africa, South and Southeast Asia, East Asia, Australia, Latin America, and Canada. Philip Morris International Inc. was incorporated in 1987 and is headquartered in New York, New York.
History (wiki)
Early development
The company states its history is traced to a London tobacconist, Philip Morris, opening a single shop on London’s Bond Street in 1847 which sold tobacco and cigarettes. In 1881, Philip Morris’ son, Leopold Morris, established “Philip Morris & Company and Grunebaum Ltd” with Joseph Grunebaum. In 1885, the company changed its name to “Philip Morris & Co. Ltd.”
In 1894, William Curtis Thomson and his family began to control the company, and in 1902 the company was incorporated in New York. In 1919, the American business was acquired and incorporated as “Philip Morris & Co. Ltd., Inc.” in Virginia.
Later development
In 1954, Philip Morris (Australia) became the first affiliate of Philip Morris & Co., Ltd, Inc. outside the U.S. In 1972, the company’s Marlboro became the world’s top-selling cigarette brand.
In 1987, Philip Morris International (PMI) was incorporated as an operating company of Philip Morris Companies Inc. In 2001, the operations center of the company was transferred from Rye Brook, New York, to Lausanne, Switzerland. On January 27, 2003, Philip Morris Companies Inc. formally changed its name to “The Altria Group”. In March 2008, Philip Morris International was spun off from Altria.
In April 2014, Philip Morris International announced that it would close its Moorabbin plant in Australia by the end of 2014 after operating for 60 years, due to the gradual decline of sales in the last ten years and difficulties conforming to 2010 Australian government regulation about reducing fire risks. In 2015, the company sold 850 billion cigarettes.
In August 2018 Reuters reported that Philip Morris “has been among foreign companies with exposure to Russia’s tobacco market. The company’s sales exposure to Russia is 7 percent, according to a note from Goldman Sachs.”
As of 2019, main institutional investors are The Vanguard Group with an 8% stake, Capital Research & Management with 5% and BlackRock Fund Advisors with 4%.
In July 2021, Philip Morris International agreed to buy Vectura Group for £1 billion.
In 2022, due to the Russian invasion of Ukraine and boycott of the Russian market by many international companies, the company has faced trouble do the its high level of exposure to the Russian market, from which it was reluctant to disinvest.
Why would I consider investing
Volatility
Tobacco sector is already beaten up, regardless of the current situation. Less people smoke year by year, tight restrictions on advertisement and overall a bad reputation. Constant cashflows and predictability on the other hand might make them interesting in a volatile market.
Revenue, EBITDA and Free Cashflow for PM look preety boring for ~10 years now (and that’s a good thing)
Their stock price seems unattractive — but what I see is s a stock which is valued sometimes a bit more, sometimes a bit less (we’re looking at 10yrs of history here) but currently ~ avg priced. Pretty borring as well to summarize.
Dividends
The dividends on the other hand seem more exciting — currently yielding more than 5% might be exactly what I’m looking for and does compensate for the lack of growth opportunities.
There is also moderate dividend growth with 3yr — 2.77%, 5yr — 3.64% and 10yr — 5.31% CAGR which does absorb normal inflation. The payout ratio ~85% might seem high — but in that sector it’s usual to see those numbers, because there isn’t too much R&D going on and their production costs are low.
Why shouldn’t I consider investing
Sinstock
It’s a sinstock — there is no discussion here. You might consider it immoral to invest in such a company. As a former smoker, my red line isn’t crossed. If it comes to cigarettes — there is still the free will of every consumer.
Dilution of Shareholders
For the last 7yrs, Philip Morris is issuing stocks which results in a dilution of its shareholders (your slice of the company becomes smaller). This might be a red flag — but sometimes its for a reason and PM invests into IQOS and recently bought Vectura Group, so additional money was needed I guess.
Risks
PM faces different risks like most of the rest of the market. Yes, they generate ~6% of their revenue in Russia and pulling out of the market. Inflation will hit them as well, but as a tobacco company they have better options to compensate inflation by rising prices.
The biggest risk I see is the uncertainty of their future. Tobacco companies are desperately searching for new markets to counterbalance losing customers constantly. PM is gaining its customers for IQOS, but the market of e-cigarettes isn’t matured yet and might change because of regulations as well and become less profitable.
Chances
I do not expect PM to make big gains. The chances to increase their revenue notably are lacking even though existing (IQOS). But if you’re looking for a story — there isn’t one yet.
My Conclusion
PM might be a nice addition to my portfolio to increase my dividend income. I will keep it on my watchlist and might make a deep dive somewhen to decide if it fits in.
Sources
- Description
- History
- Charts
