When Europe Recovers Philip Morris International Inc. (PM) Will Explode: Altria Group Inc (MO), Reynolds American, Inc. (RAI)

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The Problem Won’t Last Forever
The amount of negative press around the European economy seems to be a constant flood of information. In a way, this amount of negative publicity reminds me of the news media’s treatment of the Great Recession in this country. While this is an issue in the short-term, overseas economies will improve over time, and Philip Morris International stands to benefit.

In the current quarter, 35.32% of revenue and 30.24% of Philip Morris International Inc. (NYSE:PM)’s earnings came from the European Union. When more than one-third of your revenue falls by 8.16% year-over-year, it’s hard for the company to report huge growth. By comparison, the company’s Eastern Europe, Middle East and Africa division saw revenue increase 10.43%. There was strength to a lesser extent in the rest of the world as well, with Asia revenue up 7.56%, and Latin America & Canada revenue up 1.85%. Clearly, if the European Union had reported better results, Philip Morris International’s overall numbers would have drastically improved.

The Yield Isn’t Enough
A common misconception among novice investors is that Philip Morris International doesn’t pay a high enough yield. They would argue that if Altria can afford 5.18%, Reynolds American pays 5.47%, and Lorillard pays 5.76%, then Philip Morris International at 3.7% isn’t enough.

The problem is this assumption doesn’t pay attention to the payout ratio behind these yields, or the future growth in earnings at each company. In the current quarter, Altria’s free cash flow payout ratio was 80.22%, and Reynolds American’s payout was 229%. Given that both companies are expected to grow earnings by about 7%, there isn’t the same chance for growth in their dividend that exists elsewhere.

Lorillard seems to offer the greatest competition for investing dollars to Philip Morris International. Lorillard’s 5.76% yield is backed by a 67.46% free cash flow payout ratio. In addition, Lorillard is expected to grow earnings by about 9%, compared to 11.6% at Philip Morris International.

The key difference between the two is Philip Morris International’s focus overseas. While Lorillard’s current yield wins, their domestic focus ultimately loses the long-term race. Philip Morris has the longer growth track because of their international focus. Philip Morris’ results are being held down by problems in Europe, but when these problems fade, this stock could explode.

The article When Europe Recovers This Stock Will Explode originally appeared on Fool.com and is written by Chad Henage.

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