Phillip Morris CR: Tobacco giant boasts steady growth and more than 8% dividend yield

The tobacco industry is far from being in decline, as it may have seemed a few years after the arrival of e-cigarettes on the market. Phillip Morris products are still in high demand, allowing the company to pay a steady, above-average dividend. What does the company's situation look like on closer inspection?

Phillip Morris production hall in Kutná Hora

Company introduction

Phillip Morris International is a subsidiary of Philip Morris ČR a.s., which manufactures, sells, distributes and markets tobacco products in the Czech Republic and Slovakia. The company also distributes smokeless tobacco products under the name HEETS, IQOS tobacco heating systems, IQOS VEEV electronic cigarettes, VEEV pods e-vapor product, Fiit and lil tobacco heating systems and related accessories, as well as cigarettes. It primarily markets its tobacco products under the Marlboro, L&M, Philip Morris, Petra Klasik, Sparta and Chesterfield brands. So I dare say that whether you are a smoker or not, you will be familiar with their products. The company was formerly known as Tabák, a.s. and in November 2000 changed its name to Phillip Morris ČR a.s. The company was founded in 1812 and is based in Prague. It now employs over 1200 people.

Phillip Morris shares are currently trading at CZK 16,320, up 1.37% from the beginning of the year. This gives the company a market capitalization of CZK 44.8 billion. The forward PE ratio now stands at almost 12.

YTD share price development, source: Yahoo Finance

Financial results

As we can see in the screen below, the earnings are showing an upward trend. The company was able to achieve a record revenue of CZK 18.867 billion, which marked a 5.5% YTD growth. Gross profit has been more or less flat since 2019. Last year brought a slight decline to CZK 8.281 billion. It may be worse to look at gross margins, which are starting to fall towards 40%. Last year's gross margin was the lowest since 2015. Net profit following gross profit also did not grow much, but still reached CZK 3.516 billion. Net margin last year had already fallen below 19%, which is quite a drop until 2017, when this metric reached 29%. However, within the Phillip Morris business, I think a net margin of around 20% is not bad at all. Even more so when we compare this number to another tobacco company, Altria. There, the margin was just over 11.7% last year. The PE ratio has been in the range of 9 to 14 for the last 5 years, that seems more or less acceptable to me.

Source.

What is the company earning? As we can see in the chart below from the company's annual report, the primary revenue is still their aforementioned cigarette brands. These had a market share of over 30.7% in 2021. However, this share is gradually being eroded, for comparison in 2020 this share was 3% higher. The main reason for this can be seen in the switch of smokers to IQOS product and HEETS refills. According to Phillip Morris, the total number of IQOS users has increased by around 90,000 to over 500,000 in total. Thus, the company's smokeless products increased their market share to 11.1% from 9.2%.

Thus, as Phillip Morris reports, the overall cigarette market is declining. Last year, it declined by 9.2% to 15.4 billion units. This is attributed to reduced sales in border areas, changes in trade inventories and the continued shift by adult smokers to smokeless alternatives.

Overall, Phillip Morris' market share in the country decreased from 42.9% to 41.8%, a decrease of 1.1%.

Source: pmi.com

Within the balance sheet, we can learn that the company has been able to accumulate more and more assets gradually. Last year, the company had total assets worth C$17.744 billion, which is an increase of C$1.567 billion from 2020. The majority of the assets are current assets especially as cash, which occupy right away C$9.29 billion of the current assets. Inventories are also a significant item in which the company has CZK 1.94 billion. Within fixed assets, it is worth mentioning the company's buildings, mainly production halls, which are worth CZK 2.831 billion. A more detailed overview of assets can be seen below.

Source: pmi.com

When I look at cash flow, I am normally most interested in free cash flow. This is just the money from which the company can pay dividends to us as shareholders, for example. Free cash flow reached CZK 4.582 billion last year. Phillip Morris has been able to generate a free cash value of over CZK 4.5 billionover the last few years, which is solid. I would not worry about the stability of the company for this and many other reasons mentioned.

Last but not least, it is worth mentioning the total debt and how the company has managed to reduce it. It reached one of the highest levels ever last year, namely CZK 304 million. In 2020 it was CZK 310 million, in 2019 CZK 348 million, and in 2018 even 0. As we can see, the overall debt has been kept at a very low level, which is certainly positive.

Dividends

Now we can finally move on to the dividends, which are the most interesting thing, as we wouldn't make a big deal here in terms of capital gains, as we can assume by looking at the long-term share price chart.

The last dividend announced, the dividend for this year, was CZK 1,310 per share, which gives a dividend yield of 8.03% at the current share price. The dividend has been paid since 2019 and has been holding between CZK 1,000 and CZK 1,600 per share. The amount of the payout is influenced by how much profit is generated. This also determines the payout ratio, i.e. what percentage of profits is distributed to shareholders in the form of dividends. The company currently has a payout ratio of just under 100%, specifically 98.38%. This is a relatively high number and may indicate that the company is paying out more in dividends than its earnings can support. The word may is important in the preceding sentence, as this may not be the case either. I don't think the company should get into any financial trouble because of this, as its numbers look good. Even more so when we compare the payout ratio with that of Altria, a competitor of Phillip Morris. The payout ratio for that firm is over 370%.

Conclusion

Phillip Morris appears to be a quality company with low debt and a sustainable dividend when looking at the financials. That sounds good. But we must not forget the risks of doing business, which in this sector is mainly regulation. It has long sought to restrict cigarette products. However, it is also quite possible that it will try to restrict smokeless products within a few years, although this seems unlikely now.

If you're interested in more analysis of Czech stocks, you might check out this one on Colt CZ from early September: With a dividend yield of nearly 5%, is Colt CZ a quality stock to build passive income ?

What is your opinion on Phillip Morris CZ? Do you invest in the tobacco industry? 🤔

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