Cigarette Companies That Are Best Positioned Against Their Peers
The most popular tobacco stock amongst the hedge funds is Philip Morris International (PM). There were 39 hedge funds with this stock in their 13F portfolios at the end of last year. In total, they invested $2.4 billion in this $150 billion market cap stock. Tom Russo, whose Gardner Russo & Gardner had nearly $650 million invested in the stock at the end of 2011, was the most bullish of these money managers. Jim Simons’ Renaissance Technologies also had $200+ million invested in this position at the end of the fourth quarter. Bill Miller, Cliff Asness, Joe DiMenna, and David Dreman are also in favor of Philip Morris.
This tobacco company pays an attractive dividend to its shareholders. Last year, the company raised its quarterly dividends by over 20% to $0.77 per share. Trading at slightly below $90 per share, Philip Morris has a current dividend yield of about 3.42%, versus 2% for a 10-year Treasury bond. Philip Morris has been increasing its dividend payments every year since 2008, when it spun off from Altria Group (MO).
For the first quarter of 2012, Philip Morris’ revenues increased by 9% compared with the same quarter last year, well outpacing its industry’s average revenue growth rate of 1.3%. The strong growth in the company’s revenues helped boosted its earnings. Philip Morris’ net income increased by 13% to $2.16 billion while its EPS improved by about 18% in the first quarter this year. In fact, Philip Morris has demonstrated positive earnings growth over the past couple years. The company made $3.92 per share in 2010 and $4.84 per share in 2011. For the next few years, analysts expect Philip Morris’ EPS to reach $5.29 per share in 2012 and $5.87 per share in 2013. The expected earnings growth rate is about 9-10% per year on the average.
Other major players in the tobacco industry include Altria Group, Lorillard Inc (LO), and Reynolds American (RAI). Philip Morris has a P/E ratio of 17.9, same as that of Reynolds, while Reynolds’ expected earnings growth rate of 6% is lower than the 9-10% expected for Philip Morris. Also, Altria’s P/E ratio of 19.5 is higher than that for Philip Morris and its growth expectation of 7% is lower.
Lorillard looks a bit more attractive. It has a P/E ratio of 16.7 and its earnings are expected to grow at 10.35% annually over the next couple of years. Though the company reported flat EPS for the first quarter this year, we believe it is ready for strong earnings growth in the year ahead. Hedge funds like Lorillard, too: Jim Simons’ RenTech had $200+ million invested in the company at the end of the fourth quarter while Jean-Marie Eveillard’s First Eagle Investment Management had a position in Lorillard valued at $271 million at the end of 2011.
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- Lorillard grows share and volume