The problem, though, is that this commonly accepted wisdom is dead wrong. Tobacco investors can do quite well by buying a domestic cigarette business. In contrast, Philip Morris International Inc. (NYSE:PM) stock is looking overpriced today, and unlikely to outperform going forward. Why?
Three reasons.
Philip Morris stock is at the bottom of the pack
When you stack up Philip Morris International Inc. (NYSE:PM) stock against its rivals, it quickly becomes apparent that investors have been overpaying for an inferior company. Valued on its earnings, a share of Philip Morris stock will cost you 18.1 times earnings today, while a share of former parent Altria Group, Inc. (NYSE:MO) costs only 17.2 times earnings, and a pack of Lorillard Inc. (NYSE:LO) shares sells for a P/E of just 14.1 — 22% cheaper than Philip Morris International Inc. (NYSE:PM).
Worse, when you lay the three companies side by side, you can plainly see that Philip Morris generates far less real cash profit than does the less popular Lorillard. As a matter of fact, its free cash flow yield is even a skosh smaller than that of Altria Group, Inc. (NYSE:MO) itself!
PM free cash flow yield data by YCharts
Philip Morris isn’t growing as fast as you’ve heard
Focused on the international market, Philip Morris International Inc. (NYSE:PM) stock is currently expected to grow faster than most of its peers. To this extent, what you’ve heard about the stock is probably true. What’s interesting, though, is that Philip Morris isn’t growing all that much faster than its rivals — not enough to justify its costing 28% more than Lorillard Inc. (NYSE:LO), at least:
Second verse, same as the first
Of course, there’s still the old investing truism to consider — that investing isn’t about what a stock has done in the past, but what it might do in the future.
Problem is, the advantage in growth rates that Philip Morris International Inc. (NYSE:PM) stock currently enjoys over its competitors is actually shrinking. From 226 basis points in “extra growth” versus Lorillard Inc. (NYSE:LO) in the past five years, for example, it’s expected to contract to an advantage of only 158 b.p. in the next five years:
Now, is this continued advantage in growth rates still big enough to justify paying four P/E points more for Philip Morris stock than a share of Lorillard costs? Maybe not, once you consider one final fact: What Philip Morris stock owners gain in added earnings growth, they give up in reduced dividend yield.
That’s because faster-growing Philip Morris International Inc. (NYSE:PM) is actually a stingier dividend payer than either of its rivals. Lorillard Inc. (NYSE:LO) shareholders, for example, receive a whopping 5% dividend yield on their shares, while Altria Group, Inc. (NYSE:MO) shareholders collect a nearly as good 4.8% yield. Philip Morris stock, in contrast, pays a relatively meager 3.6%.
Foolish takeaway
With a too-high stock price, a too-low dividend yield, and an earnings growth advantage that’s shrinking, Philip Morris International Inc. (NYSE:PM) stock is priced to go nowhere.
The article Philip Morris Stock Is Going Nowhere. Here’s Why. originally appeared on Fool.com.
Fool contributor Rich Smith has no position in any stocks mentioned. The Motley Fool owns shares of Philip Morris International.
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