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Will Biden Crush This Stock – And Your Retirement Along With It?

Last week I showed you More Proof The Biden Economy Is Not Great…

That continues yesterday when I wrote the article Houston… We Have A MAJOR Problem.

And it continues as the Biden administration continues to take aim at certain industries.

But before we get to that further down this article, today I want to answer – Will Biden Crush This Stock – And Your Retirement Along With It? – after he plans to crackdown on the business.

Philip Morris International Inc (PM) is one of the world’s largest tobacco manufactures and sellers outside the United States.

At one time it was merged with fellow tobacco giant Altria – which I wrote about recently here.

But after they split from each other Altria handles the US market… While PM sells outside the US exclusively.

In 2019 it owned an estimated 28.4% share of the entire worlds tobacco industry.

And it owns – or has licenses to use – some of the most famous tobacco brands in the world.

  • Marlboro
  • Merit
  • Parliament
  • Virginian S
  • Philip Morris
  • Chesterfield
  • Red & White
  • And more.

It’s such a powerful company that not only did it survive the pandemic well many other companies flailed… It thrived.

And from its 2020 low on March 23rd its stock is up 62.4% to today.

But this is all in the past.

Today, I want to help you figure out whether you should buy it or not for your retirement portfolio.  Especially now that Biden plans to crack down on the tobacco industry hard.

It’s based in New York New York.  It has a $153.2 billion market cap. And it pays you a massive 4.9% dividend. Which is reason #1 to consider buying its stock.

Philip Morris’ 4.9% Dividend

Over the last decade PM’s paid out a total of $39.75 per share in dividends.

At today’s share count of 1.559 billion shares that’s equal to $61.97 billion paid out to shareholders in that time.

It also grew its dividend 69.1% from $2.82 per share in 2011 to $4.77 per share now.

These dividend payments will help you in normal times earn cash if you take the money out.  Or allow you to buy more shares over time if you reinvest the dividends.

These regular payments will help you earn more money for your retirement.  And the solid, stable, and growing dividends will help in any kind of prolonged economic issues like we’re dealing with today.

It can do this because it earns massive profits.  Which is reason #2 to consider buying Philip Morris for your retirement portfolio.

Philip Morris Earns Massive Profits

Over the last decade it earned an average operating income margin of 43.7% per year.

I look for anything above 10% so this is fantastic.

Another way to show this is with its free cash flow to sales ratio (FCF/Sales). Over the last decade its 25% per year on average.

I call this the “Cash Machine” metric.

I look for anything above 5% on a consistent basis for the same reasons as I look for high operating profit margins above.  If a company surpasses both thresholds it makes it a great operating business that is safe and ultra-valuable.

Philip Morris International farsurpasses both thresholds which means it’s a world class business operation.

Even with these huge profits though it has a lot of debt…

Or Does It?

As of this writing PM has $3.9 billion in cash compared to $29.4 billion in debt.

As a percentage of its balance sheet total liabilities make up a scary 130.5%. I’ll explain this in a minute. 

Debt makes up only 19.2% of its market cap.

And its debt-to-equity ratio is unreadable because of its negative equity level.

Normally when a company has more liabilities than it does assets – when you get an above 100% number on the percentage of the balance sheet from above – it’s a gigantic red flag.

Normally this means – that the company has far too much debt compared to their profitability.  And this means they’re in huge trouble of bankruptcy.

This isn’t the case for Philip Morris though.

Yes, they have more liabilities than they do assets… But most of its assets are intangible assets like brand names, competitive advantages, etc.

These only show up on the balance sheet sparingly.

Let’s illustrate this by looking at PM’s operating profits compared to its debt levels.

In the last twelve months its earned $12.2 billion in operating profits… Compared to a total of $29.4 billion in both short and long term debt.

Meaning, that PM is so profitable it could pay off all its outstanding debt within 3 years just from its operating profits.

And this means that PM does not have a huge amount of debt like it appears.

This is also why you shouldn’t rely on metrics only when investing either.

So far, PM looks like a great stock… But what about its valuation? Is it cheap enough to buy?

PM IS Cheap…

With the markets at or near all-time highs you might expect a giant like Philip Morris International to be selling at an enormous valuation.

But it’s not.

As of this writing its P/E is 17.6.

Its P/CF is 16.6.

Its forward P/E is 16.2.

And its enterprise value to operating income – EV/EBIT is 14.4.

On all three metrics at the top, I look to buy investments below 20 to consider them undervalued.

And on EV/EBIT I look to buy stocks below 8.

These metrics combined show that PM is about fairly valued right now when considering all the metrics together.

And this means owning its stock gives you a large margin of safety in investing terminology.

When you invest in stocks that have a margin of safety it makes the investment safer.  And it also means you should expect to earn higher returns owning it in the coming years.

The inverse of this is also true…

When you invest in a stock without a margin of safety it makes the investment riskier.  And it also means you should expect to earn less owning its stock going forward.

With PM being fairly valued right now, its stock gives you a large margin of safety.

Especially when you consider its world class profit and free cash flow production… And its gigantic competitive advantages like economies of scale, governmental regulations, brand name, and more we didn’t even talk about today.

However, before you buy Philip Morris you need to be aware of two major risks.

The Biden Problem

Joe Biden so far is taking aim at various industries… And now he has the tobacco industry in the crosshairs.

A couple weeks ago the Biden Administration announced that it plans to limit the amount of nicotine in tobacco-based products going forward… To levels that may not even get people addicted.

Then last week it announced in a separate ban, that it plans to outlaw menthol cigarettes as well.

At first glance this looks like it could devastate tobacco companies, right?

On deeper analysis, I don’t think it will.

Study after study has shown that just the act of smoking – getting the cigarette, lighting up, smoking, putting it out, and repeating – is addictive.

This means if nicotine levels are lowered people are still likely to continue smoking because it’s become a habit.

Second and most importantly, most people who smoke… Love smoking. And will continue doing so no matter what.

And they’ll continue doing so whether nicotine levels are lowered, or menthol cigarettes are banned.  If they are – they’ll likely switch to another form of smoking like regular cigarettes or vaping.

At this point this is all speculation though because another factor is that I don’t expect these two pieces of legislation to pass anytime soon… And potentially ever.

The tobacco companies will fight this in courts and the fight will last years… Potentially past any Biden presidency.  These companies have enough money to fight these kinds of legislation in any way they can.

And they will to protect their huge cash flows and the valuations of their companies.

For this reason, I don’t expect this legislation to pass at all.  And if it does its still years down the line.

And this means continued huge profits, cash flows, and dividends for your retirement portfolio.

If you’re comfortable with these potential risks, you should still consider investing in Philip Morris.

Conclusion

If you’re looking for a solid, safe, dividend paying, stable, and enormously profitable investment to buy to earn high and safe returns for your portfolio – Buy shares in Philip Morris – if you’re comfortable with the Biden risk mentioned above.

Disclosure – Jason Rivera is a 13+ year veteran value investor who now spends much of his time helping other investors earn higher than average investment returns safely. He does not have any holdings in any securities mentioned above and the article expresses his own opinions. He has no business relationship with any company mentioned above.

P.S. Breaking Poll – If Trump Was Still In charge Would The Economy Be Better? Vote Here

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