Summary
Philip Morris has taken a beating in recent days, down nearly 10% after the surprise election results.
The strong dollar and rising interest rates are major headwinds for the tobacco giant.
However, the 5% yield makes Philip Morris a hold in my book.
http://seekingalpha.com/article/4024964-philip-morris-4-headwinds-watch
Philip Morris (NYSE:PM) has had an up and down year so far in 2016. The company has lagged the markets over the past few years and this year will likely be more of the same. While the dividend yield is nice at nearly 5%, long-term investors in the stock should still keep an eye on some of the headwinds facing it.
1) Strong dollar woes
You can pretty much predict most of Philip Morris’ price action by using the dollar index. If the greenback rises, then Philip Morris declines. This inverse relationship tells a painful story since 2013, i.e. basically flat. The reason for this is simple. Philip Morris makes most of its revenues overseas, and a strong dollar means these foreign currencies translated into less profits.
As can be seen in the chart above, the dollar went on a big rally soon after the election and the surprise victory for Trump. As a result, Philip Morris’ stock also fell around 10%.
2) Rising interest rates
On a related note, interest rates have also risen; the 10-year is up 40 basis points to over 2.2%, lessening the appeal of Philip Morris 4.7% dividend yield. This may also impact Philip Morris’ profitability down the road as it refinances its $30 billion debt load and sees higher interest expense. The company has benefited in the past from low interest rates in order to issue debt and buy back a lot of stock.
3) Volume declines in key markets
Another concern for Philip Morris is falling cigarette volumes. Q3 volumes fell 5.4% year over year, and year to date the decline has been 3.9%. This is above the 1-3% declines seen in the US. Philip Morris is seeing weakness mostly in Asian markets, specifically from Indonesia, the Philippines and Thailand, due to various factors such as excise tax increases and the illicit trade, in Argentina due to a big tax increase which has crushed demand, and in Japan due to a shrinking market.