Philip Morris International Inc. (PM), Altria Group Inc (MO): This Global Tobacco Business is a Long Term Buy

Shareholders of Philip Morris International Inc. (NYSE:PM) are not happy with its poor returns since the beginning of the year. The company’s share price has risen only 7.10%, much lower than the S&P 500’s gain of 18.70%. Recently, the company also reported sluggish second quarter earnings results. But does that mean it’s a good time to buy Philip Morris International Inc. (NYSE:PM)? Let’s find out.

Sluggish second quarter

Philip Morris International Inc. (NYSE:PM)In the second quarter, Philip Morris International Inc. (NYSE:PM) generated around $20.48 billion in revenue, 2.2% higher than the revenue of $20 billion in the second quarter last year. However, net income fell dramatically by 8.3%, from $2.32 billion to only $2.12 billion, mainly due to higher excise taxes. In addition, cigarette shipment volume decreased by 3.9% to 228.9 billion. In terms of operating income, Philip Morris International Inc. (NYSE:PM) only experienced profit growth in Latin America & Canada, while Asia suffered the worst decline of 17.3%, from $1.36 billion last year to $1.3 billion this year.

As Philip Morris International Inc. (NYSE:PM) did most of its business outside the U.S., the stronger dollar will certainly have a negative impact on the company’s earnings. Excluding the currency effect, the Asia business declined only 9.1%, while the Latin America & Canada actually grew 5.6%. But what investors like about Philip Morris International Inc. (NYSE:PM) is its consistent share buybacks. In the second quarter, the company spent around $1.5 billion to buy back 16.7 million shares.

Is Philip Morris over-leveraged?

Interestingly, the company has used substantial leverage for the purpose of share buybacks. As of June 2013, it had negative equity of $(5.2) billion, $3.59 billion in cash, and nearly $21.56 billion in long-term debt. However, as Philip Morris generates a lot of cash, the leverage ratio (net debt to EBITDA) was quite reasonable, at only 1.52. Philip Morris is trading at $89.60 per share, with a total market cap of $146.4 billion. The market values Philip Morris at 11.5 times its trailing EBITDA.

Philip Morris was spun off from Altria Group Inc (NYSE:MO) in the first quarter of 2008. While Philip Morris focuses its operations in around 180 countries outside of the U.S., Altria Group Inc (NYSE:MO) concentrates on manufacturing and selling tobacco products in the U.S. Altria Group Inc (NYSE:MO)’s business seems to have much slower growth with the stricter regulations in the U.S. Thus, it has a lower valuation, but offers shareholders a higher dividend yield than Philip Morris. At $37 per share, Altria Group Inc (NYSE:MO) is worth $74.15 billion on the market. The market values Altria Group Inc (NYSE:MO) at 10.22 times its trailing EBITDA. The company yields 4.8%, higher than the dividend yield of 3.8% at Philip Morris.