This has to be the third or fourth time I have talked about cigarettes as an investment, but now they’re an even better buy.
Currency issues have driven the price of PM – Philip Morris (NYSE: PM) – to lows not seen since 2012, and that means a buying opportunity.
Here’s a company with all the right moves: a forward P/E of 13.7, a 4.1% dividend and a long history of dividend increases, 10% to 12% EPS growth, and a worldwide market that, despite the health risks, continues to grow.
Cigarettes are certainly not my thing – I quit in 1981 – but the rest of the world has a very different perception of smoking. While smokers here at home are becoming less common, the habit is still very prevalent in most of the world, especially Asia.
Dividend increases for PM are expected to be in the 5.9% to 8.2% range, which is lower than past increases, but the payout ratio is still in the safe 60% to 70% area.
Since the spinoff from the old Philip Morris Companies, they have spent more on stock buybacks than in dividend payments, and in less than five years have bought back almost 25% of their stock. That’s a mountain of money returned to shareholders.
And the company has another $12 billion left of the total $15 billion to spend on its current three-year buyback program.
If you combine share buybacks with dividends paid, it works out to about a 9% average return to shareholders.
The current stock price is too low, and this one is a great buying opportunity for long-term investors: Philip Morris.
A Report Card on Market Timers
You can’t turn on CNBC or look at the Journal or even Barron’s without seeing or hearing a story about a top in the market or a sell-off. So, I thought it might be a good time to take a look at how the market timers have been doing.
According to Barron’s, the market timers with the best long-term record records, 20 years, are more bullish now than before the sell-off that started in May, when Bernanke’s comments about tapering shocked the market.
And, as you might have guessed, the most bearish market timers have the worst 20-year track record and are also more bearish now than they were back in May.
Now, a short-term correction when the Fed finally makes some type of definitive announcement about tapering is certainly possible – even likely – but the difference between the two camps couldn’t be clearer.
The lowest 25% of timing performers are all bearish and are recommending a negative 36% in stocks. In other words, the most bearish and the least successful timers are recommending that you short one-third of your portfolio.
The top bullish timers are recommending 99% of equity positions in stocks. That’s a little high for me, especially when you adjust it for age, but the 20-year record is clearly on the side of the bulls.
The one caveat to this bull timing trend is that all of the top bullish timers avoid high-risk equities in this market. They are all going in the direction of blue-chip companies with a long history of significant dividend increases and a 15-year average beta of 0.65. That’s as stable as you can get. The very low betas sound to me like they are also looking for more volatility.
But track records aside, the best way to make money has always been to ignore the volatility and ride out the market. The fact that bullish timers are far more successful than the bears just adds credibility to the formula.
The “Slap in the Face” Award: Social Insecurity
Here’s a real smacker.
Social Security turned 78 years old this past month. The first checks weren’t cut until January of 1940 and went out to about 220,000 people out of a population of 132 million.
Today we have 57 million recipients out of a population of 315 million. That’s a percentage increase of over 17%: from less than 1% of the population in 1940 to about 18% today.
Best yet, the average recipient has paid into the fund only about three years’ worth of benefits, but the average life span of recipients now is about 75 to 80 years of age. That’s an average of about 10 to 15 years of payments.
That’s what the AARP lobbyists call a self-funding system. They must have studied math in the same place most of our elected officials did.