By Jimmy Butts
I can’t think of a stock that’s more hated.
We’ve written about this company several times before. And just about every time we mention it, we end up receiving nasty emails admonishing the fact that we would cover — let alone recommend — investors own shares of this company.
In fact, it happens so often that whenever we cover this stock, I instruct our staff to put in a mention that this investment isn’t for everyone.
If you don’t want to invest in this stock, I can certainly understand. But if you have an open mind toward this black sheep, you’re likely to appreciate what it can do for you.
Philip Morris (NYSE:PM) is the world’s second-largest tobacco company, behind only China National Tobacco. And it might take the title for Most Hated Company on the Planet, if I were to guess (although a few others could certainly give it a run for its money).
Despite this, PM’s brands include seven of the world’s top 15 names, including Marlboro, the number one cigarette brand worldwide. This company is a spin-off of Altria’s cigarette business outside U.S. borders. Altria continues to sell its brands, including Marlboro and Merit, in the United States, but that business is slowly shrinking.
This tobacco giant faced an increasingly restrictive set of laws in the United States and Europe roughly a decade ago, and responded with a few key moves that are still reaping benefits today: 1) squeezing every last drop of cash flow out of the legacy business, 2) diversification into new markets where tobacco consumption trends remain robust, and 3) developing new products in the smokeless tobacco market (think e-cigarettes).
Over the past decade, Philip Morris wrote the textbook on how to build a brand in new markets. The company’s eight global brands have been cultivated through savvy marketing, leading to a remarkable statistic: excluding China (which is dominated by the state-run tobacco firm), Philip Morris has claimed a 15% global market share. That’s not a claim that Ford, Coca-Cola, McDonald’s or any other blue-chip multi-national firm can make.
Philip Morris doesn’t have a complicated business model. It is simply one of the most dominant and shareholder-friendly companies on the planet. It boasts an incredible operating margin of about 39%. And in the last 10 years, it has increased dividend payments per share by 132.6%.
Today, the shares already pay a healthy yield of 5.5%. But if you bought shares today and Phillip Morris kept raising its dividend by 9.8% a year (as it has averaged on a compounded basis over the past 10 years), you’d collect a yield of 8.5% on your original investment just five years from now.
All of this simply makes the stock more valuable, even if earnings don’t rise a cent.
Of course, with investing there’s never a surefire thing. There’s no quality a company can possess that will guarantee its success.
Unfortunately, I’ve noticed that more and more investors seem to be tricked into thinking investing has to be complicated. But stocks like Philip Morris prove that making money doesn’t have to be hard.
But let’s face it… I know this stock isn’t for everyone. I wouldn’t be doing my job, however, if I didn’t point out that Philip Morris has all of the classic traits I look for in what I call a “Legacy Asset.”
Established brands. Loyal customers. Pricing power. Innovation and expansion into new markets. A history of dividend raises and share buybacks. And trading at a forward price-to-earnings ratio of less than 16, the stock looks reasonably priced. It’s got everything you’d want.
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