Once upon a time I had taken a long position in PM based on the DCF calculations that I had presented. I have to admit that I never expected to be this right on the call. But here is now a case to sell my position. This has been bothering me for the last couple of quarters and now it is really making me nervous.
Let me start with a negative book value. Over the last couple of years PM has been borrowing money (albeit at a very low interest rate) to fuel their buyback program which has been on a tear. The borrowing has been at such a ferocious pace that they have increased long term debt by over 35% in the last two years. This in itself would not have been so bad except for the rather flat income growth over the past year. Flat income paired with accelerating debt is a bad sign except you cannot see that in their EPS because they are shrinking the float at such a fast pace. The borrowing is supporting the dividend payout which is now at staggering 61% of net income.
All the above can be overlooked if they had tremendous growth potential or favorable market forces working for them, neither of which is not the case. Growth is flat to minimally positive while there are tremendous forces acting against them in various countries to curtail the use of tobacco products.
So all in all I don’t see anything good to hold on to this stock at these levels. The only thing that is keeping me from selling at this point is that my cost basis is so low that the true yield I have on that stock is enviable at over 6%. But I know that is no reason to hold to until I start seeing capital depreciation.
I guess I should stop talking and start selling.
PS: I graciously eat humble pie on Facebook (my previous post). Good thing I did not act on it on the short side. But I still believe FB will struggle to show consistent growth which should promptly bring them back.