What will it take for Philip Morris (PM) to become a high dividend stock?

Philip Morris International (PM) just bought the global rights to nicotine aerosol technology.  This move could help protect revenues and profits.  This dividend stock is currently yielding 3.68%.  I’m going to run PM through my quick valuation checks to see what will it take to make PM a high dividend stock?

Philip Morris International (PM)

Market price: $70.30

Shares: 1.78 billion

Dividend record: dividend increases every year for the past three years

Dividend: $0.64 quarterly

Dividend yield: 3.68%

Dividend payout ratio: $2.56 dividend divided by $4.08 most recent EPS = 62%

Stock price necessary for 6% dividend yield: $42.67

Earning power: a very stable $3.67 five year average earnings

Earnings yield: 5.9%

(Earnings adjusted for changes in capitalization)

            EPS     Net. Inc.          Adj. EPS

2006    $2.91   $6,130 M         $3.44

2007    $2.86   $6,038 M         $3.39

2008    $3.31   $6,890 M         $3.87

2009    $3.24   $6,342 M         $3.56

2010    $3.92   $7,259 M         $4.08

5 year average earning power per share: $3.67

Value territory @ below 12 times average earnings = $44.04 (it was near this price as recently as May 2010)

Speculative territory @ above 20 times average earnings = $73.40.  PM’s price is approaching speculative territory at 19.2 times it five year average earnings.

Balance sheet – huge hits to shareholder equity need to be investigated

Book value: $1.90 (what? Where did all the equity go?)

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Price to book value: 37 (this is horrendous)

Current ratio: 1.07 (above 2.0 is good.  PM will be strained to pay some short term debts coming due)

Quick ratio: 0.37 (above 1.0 is good)

Conclusion: If you want to own it, then put PM on your watch list for a target price of $44.04.  I will consider performing detailed analysis on PM if the price drops considerably toward the $44.04 target.  If you own it, then consider selling it at $73.40 and above.  The balance sheet scares me.

Disclosure: I don’t own Philip Morris (PM), or plan to until it yields 6% and improves its balance sheet

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Philip Morris International Buys Nicotine Aerosol Technology

By Melissa Korn

   Of DOW JONES NEWSWIRES

 

NEW YORK (Dow Jones)–Philip Morris International Inc. (PM) bought the global rights to technology that creates nicotine in the form of an aerosol as the company seeks smokeless and potentially less harmful alternatives to traditional cigarettes.

The world’s biggest tobacco company by revenue, which sells cigarettes such as Marlboro and L&M outside the U.S., bought the patent from inventors including Jed Rose, director of Duke University’s Duke Center for Nicotine and Smoking Cessation Research. Terms of the deal weren’t disclosed.

It’s too early to say what form a product might eventually take or whether it will contain tobacco, Philip Morris spokesman Peter Nixon said. He said translating the technology into a product could take "a few years."

Nicotine itself isn’t believed to cause many common smoking-related diseases. Explaining that the ailments are often linked instead to combustion, Philip Morris said the new, non-burning technology "has the potential to reduce the harm of smoking."

A number of companies have expanded their smokeless tobacco offerings in recent years amid increasing bans on indoor smoking and continued concerns over the harmful effects of cigarettes. Philip Morris is in a partnership with Swedish Match AB (SWMA.SK), which makes moist snuff products called snus, for international marketing of smokeless tobacco. British American Tobacco PLC (BATS.LN, BTI), one of Philip Morris’s major competitors, launched a startup in April to develop new nicotine-based, non-tobacco products.

Meanwhile, in the U.S., Altria Group Inc. (MO) recently began testing spit-free, tobacco-coated sticks that resemble toothpicks and Reynolds American Inc. (RAI) launched an advertising campaign this week for its Camel Snus product to coincide with an expanded smoking ban in New York City.

-By Melissa Korn, Dow Jones Newswires; 212-416-2271; melissa.korn@dowjones.com

Link to original article: http://online.wsj.com/article/BT-CO-20110526-712786.html

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Published in: on May 26, 2011 at 6:07 pm  Leave a Comment  

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