Plans by tobacco company Philip Morris International Inc (NYSE:PM) to diversify into a more ethical image seem to be unravelling. However, less queasy investors may wish to consider a company that is seen as a pariah by some and as a solid dividend payer by others.
Morris shocked both the investing and medical worlds two years ago when it bought Wiltshire-based Vectura, a maker of inhalers and medicines for smoking-related conditions, for £1 billion. There were accusations that Morris was trying to make money from treating the very illnesses that it and other tobacco companies had caused in the first place.
Critics suggested that the deal was “greenwashing,” and that Vectura would be hampered in its ability to “continue operating as a viable research-oriented business,” while Morris claimed the deal was central to its diversification into healthcare.
The critics seem to have been proved right, with several senior figures quitting Vectura. In July this year, Morris wrote $680 million off the value of Vectura, blaming unsuccessful clinical trials for its inhalable aspirin product, contract delays and increased costs. Yet Morris is committed to spending £58 million on an inhalation centre in Bristol and Bath Science Park that is due to open next year.
The attempts by the tobacco industry to diversify in the face of increased regulation and taxation in various countries goes way beyond Philip Morris, and includes food, alcohol, financial services and retailing with generally disappointing results. That leaves smokers to continue to provide the lion’s share of revenue and profits.
Morris said when it announced its half-year results in July that it was exploring the possibility of bringing in partners to help Vectura. Now it is reported to be considering other options, including selling a stake in the healthcare business.
The latest results were a mixed bag. While net revenue rose 15% year-on-year to nearly $9 billion in the second quarter, marketing, administration and research costs increased by 37% to $5.4 billion, and cost of sales rose 22% to $3.2 billion, putting a squeeze on margins.
It was a similar story for the first half as a whole, with net revenue up 9% but operating income down 16%. However, the second quarter was at least an improvement on the first.
Another positive from the company’s point of view is that people continue to smoke despite price rises. Morris sold slightly fewer cigarettes, but sales of heated tobacco products jumped 27% in the second quarter, taking total units sold up 3.3%. Again, the figures were more positive than in the first quarter.
Inflationary pressures are already easing in the second half, allowing Morris to raise its full-year forecast for net revenue growth to around 8% and for earnings per share to 8-9.5%.
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Morris is far from done with its journey towards a smoke-free future. It has just appointed to its board Victoria Marker, whose top-level experience is in media and digital communications and in energy. Even so, she is based in Virginia, the home of tobacco.
The shares have oscillated around $95 for the past two-and-a half years now, after breaking upwards from the previous range between $70 and $90. The price/earnings ratio is not too demanding at 18 and the yield is a quite attractive 5.35%.
Source: interactive investor. Past performance is not a guide to future performance.
Hobson’s choice: This is obviously not a share for ethical investors, nor is it one for traders looking for quick substantial share price gains, but it remains a magnet for those investing for income with a long-term view. The widespread hostility towards the sector remains remarkably slow to affect revenue and earnings.
The downside on the shares is probably limited to $90 and the upside to $105. Based purely on investment criterion, the shares are a buy for income under $100.
For the record, I have never smoked.
Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.
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