Shareholders of Philip Morris International (PM) have had a lot to be happy about over the last year. In the latest reported quarter, Q3 2011, the company’s net income surged by 30.5% from the prior-year quarter. The company’s operating income and free cash flow showed similar increases, climbing 29.7% and 25.6% respectively. Free cash flow for the first nine months of the year surged by 22.1% over the prior year period. The company also raised its quarterly dividend by 20.3% to an annualized rate of $3.08 per share.
Philip Morris stock has significantly outperformed the S&P 500 (SPY) index over the last year. The S&P 500 has been relatively flat over the period but Philip Morris International has returned approximately 30% over the 52-week period.
The chart above shows only capital gains and excludes the returns generated in the form of dividends. Philip Morris International has proven itself to be an excellent holding for dividend growth investors in addition to delivering capital gains. Since the company was spun-off from Altria Group (MO) in March 2008, Philip Morris International has raised its dividend by a total of 67.4%. At the time of the spin-off, Philip Morris International paid an annualized dividend of $1.84. The company has raised its dividend every year since then until it reached today’s rate of $3.08 per share annualized.
The company’s comparatively low yield (relative to its peers) is not a bad thing in this case. As the chart above shows, Philip Morris International has a lower dividend payout ratio than its peers. This means that the company is paying out a lower percentage of its net income than its peers. This could indicate that the dividend is more sustainable. It is certainly safer. For example, if Philip Morris suffered a 30% decline in net income (unlikely, but this is only an example) then the company could still afford to pay its dividend. Contrast this with Altria Group, which would not have the income to pay the dividend in the same situation. A lower dividend payout also provides the company with increased flexibility. This is because the company keeps the money that it does not spend on dividends. This money can be used for other purposes and is preferable to funding projects with debt or equity issuance.
Despite the company’s and the stock’s very strong performance over the last year, the stock still appears to be priced at a level that could prove profitable for new investors. To reiterate, the stock has substantially outperformed the Standard and Poor’s 500 index over the last year but it still does not appear to be overbought. The company actually appears to be undervalued relative to its peers.
Zack’s Investment Research estimates that Philip Morris International will earn $4.85 in 2011 (the company will announce its fourth-quarter and full-year 2011 results on February 9) and $5.18 per share in 2012. This would imply that it expects the company to grow earnings by 6.80% year over year. There is some discrepancy over this number though since the site also predicts 10% earnings growth on the same page. The 10% earnings estimate is more in line with the company’s historical growth. This tells us that the tobacco company‘s growth rate is expected to slow but Philip Morris is continuing to show growth potential. This compares favorably with some other tobacco companies such as Altria, which are expected to have declining sales (but still show earnings growth.
Philip Morris International has a PEG ratio of 1.44, which is one of the lowest of its peers.
Philip Morris International looks to be undervalued relative to its peers. The company has already been richly rewarding long-term investors but it looks like it could be poised to continue to deliver strong returns for years to come.