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Philip Morris International Inc. (PM): Analysts Are Expecting Too Much

Unfortunately, Philip Morris and Lorillard share the distinction of having negative debt-to-equity ratios. Both companies have been buying back shares, and borrowing money to do so. If you want proof, consider that Philip Morris produced about $1.38 billion in free cash flow, and then spent about $1.39 billion on dividend payments. If the company’s dividend payout ratio is 100%, where does money for share repurchases come from?

Philip Morris International Inc. (NYSE:PM)’s long-term debt increased by over $3.6 billion in the last year. While their cash reserves increased by about $1 billion, this isn’t enough to offset this additional debt burden. By comparison, Philip Morris’ old parent company carries a debt-to-equity ratio of 3.33, and Reynolds American’s debt-to-equity is a more reasonable 0.98. The bottom line is, Philip Morris has been borrowing money to buy back shares.

While it sounds great to assume that when growth returns to the European Union that Philip Morris International Inc. (NYSE:PM) will do much better, the numbers don’t bear that conclusion out. If the company can’t cut costs, they would have to raise prices to improve their margins. If they can’t continue taking on long-term debt to buy back shares, their EPS comparisons become more difficult. If investors expect this company to produce 11% EPS growth, I’m afraid they are going to be disappointed.

Given that the stock already has the lowest yield of the group, and the highest forward Price/Earnings (P/E) ratio, any weakness in their growth rate would be a major headwind against the stock. Investors should temper their expectations, because it looks like analysts are going to be wrong again.

Chad Henage has no position in any stocks mentioned. The Motley Fool owns shares of Philip Morris International. Chad is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Analysts Are Expecting Too Much originally appeared on Fool.com and is written by Chad Henage.

Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.

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