Thursday, 5 February 2015

Why I am holding onto my shares in Philip Morris International

I titled my last write-up on Philip Morris International 'FX hurts but story still on track' and leafing through the latest quarterly report from the company I broadly feel the same.

The Q4/FY 14 numbers were perfectly acceptable/within range on an underlying basis...


...and even included a dividend increase (taking the dividend to the equivalent of just under a 5% yield) plus the repurchase of shares at an average price of just over US$84/share.

Now we move to the more interesting aspect.  As @BarbarianCap put it:

between CHF HQ, USD debt, dividends and stock, no US biz, is probably the worst large cap staple in terms of FX hit.

Looking at the 2015 guidance you can see the correctness of this observation: the FX exclusion equated to a cool 24% of FY14 EPS or 23% or 'adjusted diluted EPS of $5.02 in 2014'. Serious stuff.

And it does not end there.  It sounds as if there are not going to be any buybacks too:



Now this is interesting.  So is the Philip Morris balance sheet - with its near 5% dividend yield - stretched?  Well on the headline metrics the answer is not obviously (even if the net debt:ebitda multiples have deteriorated):


If you look at the FY14 metrics then the just over US$6bn cost of paying that c. US$4/share dividend can be financed from free cash flow...but it is getting tighter (especially with any greater FX impact) and hence any buyback would have almost inevitably pushed up the net debt level: 


So would stopping the buyback have any big impact?  Well looking at the historic buyback levels collectively in the period below it equated to a price of just over US$87.

Given today's share price near that interesting US$80 level I do not see a problem/overhang from this. 


Fundamentally this business is pushing on quite sensibly - as evidenced by the market share gains in Europe in all geographies - driven by strong brands and price increases.  


At x12.8 FY14A EV/ebit the valuation is not headline cheap - but that's the FX impact also overhanging.  I say at the moment the near 5% yield is sustainable and that currencies move around - and certainly as a non-US dollar investor myself it is not a great hindrance.

So a yield stock for the moment - and any US dollar weak patch should send the share up to US$90.  I hold on.

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