Yesterday I closed out my position in Philip Morris Inc (PM) with a net gain of 31% including dividends. I still believe the tobacco industry is an excellent place to be due to an addictive product resulting in a very inelastic demand curve helping big tobacco to grow revenues despite shrinking cigarette volumes. Further little CAPEX requirements pave way for robust cash flows in the industry.
Nevertheless, at some price even the best business becomes an attractive sell. As of yesterday PM traded at around 25x earnings and 20x FCF, which is considerably higher than multiples demanded by the company in the past. Average P/E ratio over the past 5 years was 17. Going forward an investment in PM at a share price of about 102 is nothing to get excited about for an investor seeking to outperform the market. Returns in the future will likely be subpar (in case there is no unexpected dollar weakness).
Unfortunately selling PM means foregoing precious dividend income, unless I can replace the holding with an equally high yielding investment. However, traditional high yielding investments have become more and more expensive because of income hunting investors in ZIRP/NIRP times. Hence, I will likely refrain from chasing high yielders and focus more on small-cap opportunities that promise healthy capital appreciation.
By selling PM my portfolio became even more concentrated around core holdings such as IBM. Allocating more capital to my cheapest holdings (e.g. RICK) would therefore deter further from my goal of holding stock of at least ten different companies. In case share prices of RICK and the like do not fall significantly, which would make them almost irresistible, I will try to spread out my newly available capital to a minimum of two new names.