Opportunities For Continued Growth
Philip Morris enjoys a dominant industry position. Its market share gained 0.3 percentage points to start 2015, and now sits at 28.6% across the world excluding the U.S. and China. In 2014, Philip Morris held the number one or number two positions in 29 out of the 40 largest markets by industry net revenue. Overall, it owns six of the top 15 international cigarette brands, which include Marlboro, L&M, Parliament, Bond Street, Chesterfield and Philip Morris, all of which increased their market share to start this year.
Looking forward, it’s likely Philip Morris’ fundamentals will improve further from here. First, the company has new ‘reduced-risk’ products, such as e-cigarettes, that should contribute to future growth. These e-cig products are called iQOS and Marlboro HeatSticks, which were recently introduced in Nagoya, Japan, and Milan, Italy. Management believes these new products offer a unique and more enjoyable consumer experience, as they focus on innovation and product convenience benefits, such as no ash and less smell. Furthermore, these products heat tobacco rather than burn it, which could be a safer alternative to traditional cigarettes. Preliminary results have been positive, enough so that management plans national roll-outs in those two countries. If all goes well, these products will then be shipped to additional markets later this year.
Dividend Remains Secure
Philip Morris International Inc. (NYSE:PM) is seeing revenue and earnings suffer because of the strong U.S. dollar and weakening Euro zone. But the underlying business remains strong, and the company is taking the necessary steps to cut spending while times are tough. For example, Philip Morris will not buy back stock this year, which cost the company about $3.8 billion last year. In addition, it will reduce spending. Last year alone, it reduced its cost structure by $300 million, with further productivity measures in place this year. These include enhancing production processes, harmonizing tobacco blends, and supply chain improvements. Andy Brown’s Cedar Rock Capital has a huge $900 million position in the stock.
For these reasons, management expects 2015 free cash flow is expected to be roughly in-line with last year’s free cash flow. Meanwhile, Philip Morris expects $4.32 per share to $4.42 per share in profit this year. This can easily cover its $4 per share dividend. As a result, it appears Philip Morris’ 5% dividend is secure. Philip Morris’ unique mix of high yield, stable cash flows, and solid growth prospects make it an excellent choice for any investor looking to add to their dividend growth portfolio.
Disclosure: This article is written by Bob Ciura. He doesn’t hold any shares of PM.