My third (and final) purchase during this past week occurred mid-afternoon on Friday, when I bought shares of Philip Morris International (PM), one of the largest tobacco companies in the world. My most recent previous purchase of PM was over two years ago (October 2011), before I had started this blog.
I think PM is slightly undervalued at the current price. It has a P/E of 15.9 (vs. a 5-year historical average of 15.1), P/S of 4.3 (vs. 1.6), and dividend yield of 4.6% (vs. 4.0%). Using a Dividend Discount Model with a dividend growth rate of 7% (lower than the 5-year historical rate) and a discount rate equal to the current yield plus the dividend growth rate, I calculate a fair value of $87.47. Morningstar gives a fair value of $93.00 and a 4-star rating. The average of those two estimates is $90.24, which implies a 9.4% margin of safety at my purchase price.
Josh Peters, Editor of Morningstar's DividendInvestor newsletter, considers PM to be a "top pick" for this year. The stock is profiled in the latest issue of the monthly newsletter, where it is acknowledged that 2014 will be a tough year for the company. However, Peters thinks the short-term slowdown in growth is already reflected in the stock's price, resulting in an excellent buying opportunity. Coincidentally, I had independently reached the same conclusion before reading the newsletter article.
I bought 20 shares of PM at the price of $81.75 per share plus commission, giving me a 4.58% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $18.80 from this purchase, which will add a total of $75.20 to my annual dividend income. This purchase was made in my Roth IRA using rollover money. I now have a total of 70 shares of PM and I will receive combined quarterly dividends of $65.80. My forward 12-month dividend total increases to $4,206.