What Are The Risks Associated With Holding Philip Morris’ Stock?

Tobacco giant Philip Morris International (NYSE:PM) has performed exceptionally since it became an entity separate from Altria in 2008. It is also known for its hefty dividends, another reason for it to be a favored stock in any portfolio. However, like others in the tobacco industry, the company has had to trudge a difficult course to sustain its financial performance. Here we list some of the risks that the company faces.

See Our Complete Analysis For Philip Morris International

1. Unsustainable Dividend Payout Ratio

The dividend payout ratio indicates the amount of money a company returns to its shareholders, as compared to the amount it is retaining to reinvest in growth, pay off its debt, or add to its cash reserves. As Philip Morris is a mature company, it has a high payout ratio. Currently, this metric stands at 95% for the company. The company has a history of upping its dividend since its separation in 2008, and the company does not seem to want to halt this tradition. However, Philip Morris’ profits have been negatively hampered in recent quarters as a result of the strong dollar, since its sales are from overseas. If the dollar value goes up relative to the currency in which its earnings were made, the company would see a drop in its sales value in dollar terms. When compared with a healthier ~80% payout ratio for Altria, PM’s ratio seems unsustainable.

2. Beta Value

Beta is a measure of the volatility of a security, when compared to the market as a whole. While most stocks move as a result of pressure in the broader stock market, some can be considered more volatile than others. A company with a beta of one would mean its stock’s price would move with the market, and a beta of less than one would indicate a company that is less volatile than the market. Meanwhile, a beta greater than one would imply greater volatility when compared to the market. Philip Morris’ beta is 0.98, which implies movement very close to the stock market. While it is not perfectly correlated, however, since the value is so close to one, investors can expect the stock to mimic the broader market.

3. Foreign Currency Headwinds

As the company is US based, but derives all of its revenues from international sales, it is highly exposed to the strength of the dollar. For years, this has hurt the company, with long-term weakness in the euro and Japanese yen damaging its results. PM attains 40% of its revenue from Europe, with 30% coming from the European Union. While the dollar fell against the Euro in the beginning of the year, as a result of the announcement of a delay in the interest rate hike by the Fed, it has risen significantly once the Brexit was declared. Furthermore, the company is also exposed to the Australian dollar and the Canadian dollar, which have both been weak due to the low commodity prices. Currency risk has played a dampener on the company’s earnings recently. In the year 2015, the company reported that negative currency impacts resulted in the company earning $1.20 less per share. However, PM expects the headwinds to finally start to wane, with the company boosting its EPS guidance for the year 2016 to $4.45-$4.55, from an earlier expectation of $4.40-$4.50, driven solely by currency.

Have more questions on Philip Morris? See the links below:

• Can iQOS Be A Key Growth Driver For Philip Morris In The Future?
• What Led To The Poor Performance Of Philip Morris In Its Latin America And Canada Region In The Second Quarter?
• Philip Morris Q2 2016 Earnings: Currency Headwinds Leave The Company Flat
• How Will Philip Morris Perform In Q2 2016?
• Which Is A Better Dividend Bet – Altria Or Philip Morris?
• What Is The State Of The Illicit Cigarette Market In The European Union?
• How Will The Brexit Impact Philip Morris?
• What Effect Will The Plain Packaging Ruling In Canada Have On Philip Morris?
• What Effect Will A Tobacco Tax Hike Have In New Zealand?
• How Will Philip Morris Perform In 2016?
• Why Has Philip Morris’ Price Risen ~17% This Year Despite An Earnings Miss?
• How Did The Market Share For Philip Morris Change in Q1 2016 In EU And Its Key Markets, As Compared To Q1 2015?
• How Did The Revenue And Operating Companies Income In Each Region Change In Q1 2016, As Compared To Q1 2015?
• Philip Morris Misses Q1 Revenue And EPS Estimates
• Will Philip Morris Beat Expectations This Earnings Season?
• How Did Philip Morris Perform In The European Union, And Its Key Markets There, In 2015?
• How Did Philip Morris Perform In Russia, Given The Currency Headwinds And Excise Tax Rise?
• How Has Philip Morris Fared In Comparison To Its Peers?
• How Has Philip Morris’ Shipment Volume, By Brand, Changed Over The Past 3 Years?
• How Has Philip Morris’ Revenue And EBITDA Composition Changed In The Last 5 Years?
• How Will Philip Morris’ Revenue And EBITDA Change In The Next 3 Years?
• Philip Morris: Year 2015 In Review
• By What Percentage Did Philip Morris’ Revenue & EBITDA Change In The Last 5 Years?
• What is Philip Morris’ Fundamental Value Based On Expected 2016 Results?
• What is Philip Morris’ Revenue And EBITDA Breakdown?

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