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The 'Most Hated Company On Earth' That I'd Like To Own 'Forever'
Somestocks are good for a quick pop, but you have to time it
just right. Case in point:
Netflix (Nasdaq: NFLX)
investors have seen several double-digit surges over the lastyear
. They've also seen thestock plummet by as much as a third on
more than a few occasions.
High-risk and high-reward stocks are great for kick-starting a portfolio, and they certainly makeinvesting interesting, but many investors have been broken by high-flying has-beens. For instance, wireless giant BlackBerry (Nasdaq: BBRY) made alot of peoplewealthy as its stock price rocketed 17-fold between 2003 and 2007. Investors who bought in at BBRY's height, on the other hand, are looking at a 90% loss.
A chance at overnight success is great, but the single best
way to makemoney in stocks is to buy those you canbuy and hold
"forever." These "Forever" stocks, as StreetAuthority co-founder
Paul Tracy calls them, combine consistent growth andincome and
have stood the test of time. These companies enjoy a competitive
advantage through industry forces like low bargaining power of
buyers and suppliers, high barriers to entry, low threats from
substitutes, and minimal rivalry among competitors.
These companies are here to stay -- in your portfolio.
One of these "Forever" stocks is a company in one of the most hated industries, yet the stock is in the portfolio of almost 1,400 institutionalfunds . The industry's product has been shown tokill its customers over the longterm , and this company is the largest among them. If you haven't already guessed, the industry is tobacco, and the company is Philip Morris International ( PM ) , the world's largest publicly traded manufacturer and marketer of tobacco products.
Why should investors loveshares of a company that is so hated?
Because it has consistently outperformed themarket and provided
stable growth and income. Since the worst of the financial
meltdown, shares of Philip Morris have rebounded 143% versus 110%
for the S&P 500. That pricegain is above the 3.9%dividend
yield , a payout that the company has increased 85% since 2008.
Philip Morris has seven of the top cigarette brands, including Marlboro, the market leader. The company sells across a diverse market, with Asiaaccounting for 36% of internationalsales last year, followed by Eastern Europe, the Middle East and Africa at 27%, the European Union at 26%, and Latin America and Canada at 11%.
Excluding China and the United States, the company's share of total globalvolume increased from 24.9% in 2007 to 28.8% in 2012. On top of an increasing share of the market, after three consecutive years of declining volume to 2010, unit sales of cigarettes have been increasing by an average of 2.8% per year, to 93.7 billion units in 2012. Higher excisetaxes in Europe have led to some unit declines, but these have beenoffset by dramatic increases in the Asian markets.
China is where the growth lies in the industry, with 44% of last year's estimated industry volume outside the United States. There are an estimated 301 million people smoking in China. This number is growing at an annual rate of 3.9%, and China had the lowest quit rates in a survey of 16 emerging and industrialized countries. The Chinese market is largely state-controlled through the China National Tobacco Corp., with which Philip Morris is establishing joint ventures.
The company has made a firm commitment of returningcash to shareholders and has managed the trade-off between growth and dividends superbly. Free cash flows have increased at a 13.3%compound annual rate since 2007 to $8.4 billion in 2012.
Philip Morris has consistently beaten its long-term annual target of 10% to 12% growth inearnings per share ( EPS ) with a five-year average growth of 15%. In this year's second quarter, the company announced a three-year, $18 billion stock repurchase program. At the current price, this represents a reduction in share count of about 4% each year, which should helpsupport EPS growth. Since 2008, Philip Morris has spent $24.4 billion to buy back about 450 million shares for a reduction of 21.3% in the number ofshares outstanding .
As hazardous to your health as smoking is, Philip Morris offers clear benefits for your portfolio's health. EPS growth in excess of 12% per year, which includes a share count reduction of 4%, and a 3.9%dividend are returns you would be hard-pressed to find in the strongestgrowth stocks -- let alone a company in a mature and stable market with forever potential.
Risks to Consider: The risks to Philip Morris and the industry in general are short-term scares surrounding legislation and substitute products. The shares drop every time rumors of new regulations hit, but legislation has yet to dent the industry's long-term profitability or outlook.
Action to Take --> Philip Morris International has true forever potential in an industry with stable growth and terrificcash flow . You don't have to like its products, but you can't deny a history of market-beating returns.