Philip Morris: Declining Cigarette Volumes Don’t Threaten Cash Flows to Shareholders

Marlboro Lights

Philip Morris revealed third quarter earnings, excluding excise taxes, of $7.9 billion, which are down 5.3 percent on the year. Excluding unfavorable currency effects and effect from purchases, profits increased 3.4 percent on the year. Cigarette volumes dropped 1.3 percent on the year, resulting from weakness in Europe. On average, analysts predicted the company to report third quarter income of $8.3 billion.

In July of this year, Philip Morris, the maker of well-known Marlboro cigarettes, finished its $12 billion share buy-back program, which started in May of 2010. The three-year buy-back program was finished ahead of schedule. In August, Philip Morris released a new three-year $18 billion buy-back plan. During the year, the company repurchased $1.5 billion in shares.

For the full year of 2012, Philip Morris plans to report revenue per diluted share between $5.12-$5.18. Full year revenue was adversely influenced by the influence of a strong US dollar, reducing full year revenue per share by $0.23 per share. On average, analysts expected full year revenue of $5.20 per share.

The market presently values Philip Morris at $148.5 billion. This values the tobacco company at 1.9 times yearly earnings and roughly 16 times yearly revenue.

At present, Philip Morris gives a quarterly dividend of $0.85 per share, for a yearly dividend yield of 3.9 percent.

Since the split-off from Altria in 2008, shares of Philip Morris have taken back some 80%. Shares traded in as low as $33 in 2009 and continuously increased to highs of $94 in 2012. Between 2008 and 2012, the cigarette maker increased its profits from $63.6 billion in 2008, to an expected $77 billion in 2012. Net earnings went up from $6.9 billion to $9.0 billion.

Over the past five years, Altria Group outdated some 15% of its shares outstanding, increasing revenue per share from $3.31 per share in 2008, to an expected $5.15 per share in 2012. Philip Morris is experiencing difficulties because volume growth in Europe continues to be under pressure. Volume growth in Asia and the rest of the world is not sufficient to balance drops in grown up economies. In addition, volumes decreased in countries affected hard by the economic crisis, including Southern Europe.

While operations are flat, cash flows to investors keep on being considerable. The tobacco group gives a dividend yielding almost 4 percent currently. Moreover, it retires approximately 4 percent of its shares outstanding per year. All together, dividends and share repurchases complete about 8 percent per year.

Investors looking for dividends could acquire shares for a nice annual paycheck but should not expect huge capital profits.

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