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.
Nice pick up! I think PM is one of most attractive DGI stocks at current levels. PM was one of the first positions in my DGI portfolio I started back in June and would love to add to my position if it continues falling. Tough thing is, I still have so many other companies I want to add like KO and JNJ. If the market keeps falling, its going to present a difficult but welcome choice :)
ReplyDeleteDMU: Thanks! PM was one of the top stocks on my watch list heading into last week, so I was glad to see it dragged down to my target price amid the broad market dip at the end of the week. Like you, I also find myself wanting to increase my positions in multiple stocks, but cash constraints will force me to be selective.
DeleteNice buy at a very good price. Not that it matters much, but PM, CVX and MCD made it on Investment Quality Trends Lucky 13 2014 List.
ReplyDeleteADY: Thanks -- it sounds like Investment Quality Trends is using my watch list for their list. :)
Deletegreat buy on all three.
ReplyDeleteFFd: Thank you!
DeleteI really like PM at these prices. I added 12 shares last week in my Roth and might have to add some more in my taxable account because these prices are really good.
ReplyDeletePIP: PM is definitely attractive at the current price. Even though this purchase makes it the fifth-largest position in my portfolio, I would be open to the prospect of another similar-sized purchase, especially if the stock price dips below $80.
DeleteDGM,
ReplyDeleteDGI also declared this a top stock for 2014. I could use some tobacco exposure in my holdings too. PM is on my list. Another addictive product, gotta love that.
-RBD
RBD: It seems like PM is popping up on several investors' lists of 2014 stock picks. It is the only exposure to tobacco in my portfolio and I prefer its international business over domestic alternatives such as MO and LO.
DeleteDGM,
ReplyDeleteGreat buy, man. I think PM is a great pick at these prices. The ONLY thing keeping me from buying more right now is that I already have 100 shares and it's one of my biggest positions. However, I might be willing to temporarily overweight this one because I think there's a great opportunity here. I sold INTC on Friday and picked up shares in two other companies....but PM was high on my list. I still may pick up some more soon.
Great job with CVX and WMT as well. I think the best buys right now are in retail, select REITs and energy. PM is one of the best picks in the consumer space.
Best wishes!
DM: Thank you! I understand the hesitation in adding to your PM position -- I also pay attention to position weights in my portfolio. After this purchase, PM is now my fifth-largest position, with a 4.3% weight. I don't regard that number as being too high, so I would not be against making another similar-sized purchase in the near future.
DeleteI was happy to buy more CVX (making it my third-largest position) and WMT (bringing it closer in weight to my TGT position). If TGT continues to sell off, then I will consider buying more shares.
I read on your blog and on SA about your decision to sell INTC. I think you provided good justification for the move. Perhaps I am more patient and/or optimistic about INTC than most dividend growth investors, because I plan to continue holding my position for the time being.
I'll take a guess that one of the stocks you bought with your INTC proceeds was OHI.
Great buy here DGM! I would absolutely add to my position right now if I had the available capital.
ReplyDeletew2r: Thanks!
DeleteHi DGM,
ReplyDeletePM is a great purchase!
I have MO,LO, BTI and Imperial Tobacco.
That means I have 19 percent from my portfolio in tobacco stocks.
But I want more tobacco stocks ;-)
I love the dividend yield!
And PM will be one of my next purchases.
regards and good luck with PM!
D-S
D-S: Thank you! My portfolio's exposure to tobacco is solely through PM, which has a 4.3% weight. In the past I have looked at the other tobacco stocks you mentioned, but I usually latched onto attractive opportunities in other sectors. However, I could not resist adding to my PM position at current levels.
DeletePM seems to be one of the best tobacco plays because its all international. Smoking in the U.S. is in decline and I think will continue to be so for the future but internationally? There are a lot of people rising to middle class in emerging markets that will be buying tobacco.
ReplyDeleteIf I were ever going to invest in this industry it would be PM.
Nice buy. I've been adding more myself even though it's becoming a little overweight (currently 3.4%). It's hard to pass up these good opportunities.
ReplyDelete