Putnam Equity Income Fund Manager’s Take on Philip Morris & JP Morgan Chase
Q: You own Philip Morris International ( PM ) and you’ve added to that position recently. What do you like about the company? It has lagged in the past few years.
A: It has been out of favor, largely because of foreign exchange. Philip Morris International is exclusively non-U.S. sales. The company has exposure to some tougher areas like Russia. What we see though is that the company has pricing power. A lot of people asked about what lower gas prices are doing. There are lower fuel prices internationally, and with that, there is actually a volume pickup in sticks, as we call cigarettes in the business. It is not encouraging people to start smoking, but those who smoke are smoking more. And anyone who has pricing power in this low inflationary environment really has fundamental support. Even though Philip Morris International has volume declines year on year, we still see that made up by pricing. Philip Morris International also has a huge lead in the lower harm business, the e-cigarette business, and has seen people switch from cigarettes to e-cigarettes.
Q: Do you think the dividend is safe? The stock yields almost 5%.
A: Yes. The tobacco companies generate large cash flows so their ability to pay dividends is solid. I think the company would be loathe to ever cut its dividend. Free cash flow is very strong.
And on JP Morgan Chase (JPM).
Q: How about financials? You own Citigroup ( C ), Wells Fargo ( WFC ), and JPMorgan Chase. What do you like about the sector?
A: We are underweight the sector pretty significantly relative to our benchmark, the Russell 1000 Value, in that financials are a large portion of that benchmark. But JPMorgan is among our favorite names given that the company still drives solid returns even in the current environment and trades at a small premium relative to its tangible book value. What we see is this great franchise with great assets. Jamie Dimon and his management team have done a fantastic job of taking costs out, and we think they’ll continue to do that. We saw in the first quarter a lot more trading activity going on. The only negative I view on JPMorgan and Citigroup is the regulatory environment, which is still just as bearish as it was three years ago. JPMorgan settled the foreign exchange rigging scandal for a lot less than we thought it would. The company admitted to criminal wrongdoing, but in a very small subsidiary, so a lot of the legal issues are now in the rearview mirror.