Cash Flow Is Key… When it comes to evaluating the safety of a dividend, the first thing we need to verify – given the current economic slowdown – is demand for a company’s products. After all, a company needs to generate a steady stream of cash in order to keep paying its shareholders.

But this dividend stock is ideally suited to weather the economic mess and is well capable of bolstering your income.

Look no further than Philip Morris International, Inc. (NYSE: PM).

Repeat Business… No Matter What The Economy Is Doing

I’m going to give you 10 reasons why Philip Morris’s dividend-paying capability is so solid.

And given that consistent business is so crucial to a company’s cash flow generation, it’s no surprise to see that the first three reasons all focus on the firm’s rock-solid demand…

1. Recessions Don’t Matter: As you might suspect, addictive products tend to enjoy the steadiest demand. In fact, based on empirical evidence from Citi Investment Research, the last two recessions “had no material effect on [cigarette] demand.” This recession should be no different.

2. Population Growth Offsets Higher Taxes: Obviously, demand is not inelastic. Consumers are sensitive to price changes. And as the world’s governments contend with sagging economies, they continue to hike cigarette taxes in order to meet budget obligations.

The World Health Organization estimates for every 10% increase in price, demand slips by 4% in mature markets and by 8% in developing markets. However, when you factor in population growth, the impact is almost cut in half. More importantly, Philip Morris’ highest margin markets (accounting for 60% of revenues) come from the less impacted mature markets. In other words, the company’s profits are extremely durable.

3. Emerging Markets: The WHO estimates that 80% of the world’s 1.3 billion smokers live in developing countries. And sales in emerging markets are increasing modestly, compared to declining volumes in developed markets.

Philip Morris is uniquely positioned to capture the lion’s share of this growth. It operates in 160 countries and derives over 60% of its sales from emerging markets. It also owns seven of the leading 15 international brands, including the hands-down leader, Marlboro.

So it’s no surprise that total volumes increased a steady 2.5% in 2008. And total sales, net of excise taxes, increased by 12.7% to $25.7 billion. As management acknowledges, there’s no mistaking that, “This strong performance was driven by emerging markets.”

Now how about that cash?

If Cash Is King, Philip Morris Rules

Beyond steady demand, we also need to verify that cash isn’t being misspent and thus jeopardizing the dividend payment. The next three reasons pertain to Philip Morris’ ability to pay its dividend indefinitely…

4. Ample Free Cash Flow: In 2008, Philip Morris generated $6.8 billion in free cash flow, thanks to solid sales growth, supply-chain optimization and other cost-cutting initiatives. That was a year-over-year increase of 52.7%. Best of all, this figure should keep climbing, as the company is only about halfway through its three-year, $1.5 billion cost-reduction program.

5. A Solid Cash Buffer: With $2.4 billion in the bank, Philip Morris is sitting on enough cash to cover two quarters worth of dividends.

6. Minimal Litigation And Regulation Risk: The 2008 spin-off from Altria eliminated the legal and regulatory risks facing domestic operations. In other words, we don’t have to worry about the possibility of any adverse judgments that would require Philip Morris to pay enormous settlements and hinder its ability to pay short and intermediate-term dividends. Same goes for newly passed legislation, which grants the FDA regulatory control over the industry.

7. Credit Is No Concern: The bulk of the company’s debt was issued before the credit markets soured. And because it’s well laddered at “attractive interest rates,” there’s no concern about interest costs skyrocketing and cutting into dividend payments, due to untimely refinancing. Should any emergencies arise, the company can tap into its $6 billion in unused bank credit lines.

8. The Payout Ratio Is Conservative: Even after increasing the dividend by 17.4% in August (to $0.54 per quarter), Philip Morris still only paying out 61% of profits. So profits would need to drop dramatically in order to pose an immediate threat to the current payout. The low ratio also leaves plenty of room to increase the dividend.

Now for the final two reasons why Philip Morris’ dividend is solid…

Management Strength And A Currency Boost

The final two reasons the company’s dividend is safe pertain to management and market predictions. Because they’re subjective, they’re not significant on a stand-alone basis. But they do contribute positively to the overall outlook for the stock…

9. Management Pedigree And Commitment: Remember, Philip Morris spun off from Altria, which had increased its dividend in 39 out of the last 41 years. That history and “commitment to reward our shareholders generously” is ingrained in Philip Morris’ management. And as the CFO reveals, if maintaining that commitment “means that the payout ratio overshoots 65% [occasionally], so be it.”

10. Currency Tailwinds: A strong dollar hurts results because Philip Morris is based in the United States, yet records almost all of its sales in foreign markets. However, many experts (including yours truly) believe the dollar is doomed, which will only magnify the company’s profitability.

A Solid Dividend… And 14% Earnings Growth To Boot

In the end, the fundamentals above prove the most important thing to income-seeking investors: The dividend is safe.

They also point to the prospects for steady share appreciation. After all, the stock is trading cheaply at just 12 times earnings. Management also expects to increase earnings by 14% next year.

As CFO Hermann Waldemer explains, “We have excellent momentum going into 2009. Our market shares are growing overall… And our share growth is accelerating [too].”

And this is the reason to buy before the company reports its quarterly earnings on July 23: Because we’ll get proof. If we wait for the results, I’m afraid the shares will get away from us and diminish the yield.

At current prices, Philip Morris pays a reliable 5% with strong prospects for stock appreciation, too. So don’t miss out.
Good investing,
Louis Basenese

Source :  Philip Morris: 10 Reasons To Buy This Dividend Stock Before Next Thursday

Editors Note: This article appears as a guest editorial by Louis Basenese, Advisory Panelist, Investment U.

This has had a negative effect on commodity prices. It has also brought considerable relief to consumers in the form of lower gas prices.

However, US exporters have watched their products become 10% more expensive in just two months.

Andrew Gordon says shorting US stocks with a heavy reliance on overseas sales is a great way to profit from US dollar strength. He lists the ten companies most vulnerable to further gains in the buck.

This from Investor’s Daily Edge:

There’s lots of ways to trade a strengthening dollar. One of the ways is to bet against the companies hurt by a dollar increasing in value.

Companies that rely on exports and overseas sales for a substantial portion of their total revenue would certainly qualify.

In a matter of a couple of months, their goods and services have become around 10 percent more expensive in overseas markets. Put another way, overseas customers are now paying a 10 percent premium on what they are now buying from U.S. companies.

It’s got to hurt sales and overseas sales revenue. And that is what some investors are counting on.

According to Bespoke Group, since mid-July, the 106 companies in the S&P 500 with more than 50 percent or their revenues coming from overseas markets have underperformed their benchmark index. Investors are selling and playing them short.

The ten with the highest international exposure are:

Philip Morris International (NYSE:PM) (100 percent exposure),

Newmont Mining (NYSE:NEM)(95 percent),

NVIDIA (NASDAQ:NVDA)(92 percent),

Advanced Micro Devices (NYSE:AMD) (88 percent),

Texas Instruments (NYSE:TXN) (87 percent),

Qualcomm (NASDAQ:QCOM) (87 percent),

Intel (NASDAQ:INTC) (84 percent),

Applied Materials (NASDAQ:AMAT) (84 percent),

AES Corp. (NYSE:AES) (81 percent),

Colgate Palmolive (NYSE:CL)(80 percent).

Just because their shares aren’t performing well right now doesn’t mean that all these companies will make smaller profits.But it does put pressure on margins, cash flow and the bottom line. In the above list, I still like Philip Morris. It’s done a good job of getting customers to trade up to its premium brands.

Source: The Curse of the Strong Dollar

According to Jeremey Siegel, a professor of finance in the Wharton School of the University of Pennsylvannia. “Stocks remain your best investment for the long run. Neither bonds nor gold can match stocks if you have an adequate time horizon.”

Gold bugs Bill Bonner and The Mogambo Guru may disagree. But Floyd Brown at InvestmentU.com says “given the bank and mortgage defaults and the depressing results of stocks this summer, Siegel’s message was reassuring and full of optimism.”

Professor Siegel’s findings, which are the product of years of academic research, captivated the audience. Take a look at some returns that caught my eye…

His research proves that over time, stocks are a superior investment to all other asset classes. Over the long term, stocks have returned 6.8% per year after inflation. Whereas gold has returned -0.4% (failing to keep up with inflation) and bonds have only a 1.7% return. After taxes, the outperformance of stocks is even greater.

Source: The “Wizard’s” Favorite Ratio for Evaluating Stocks

It’s a blue-chip company. But it’s not a bank. Or a car manufacturer. Or Mircorsoft. Or Google.

It’s cigarette company Philip Morris.

Despite litigation and all the negative publicity, Ian Davis in the Growth Stock Wire thinks an investment in cigarettes is an excellent recession play – they do have a 15% annualized growth rate after all…

 Back in the day, cigarette smoking was a respectable business.

In the 19th century, Philip Morris (PM) was a luxury cigarette company and had one tiny, boutique shop on London’s Bond Street.

In 1901, by royal warrant, Philip Morris & Co. became the royal tobacconist to King Edward VII… and with success came growth. Just one year later, the company expanded its business to the United States.

In 1938, the company went public… and investors have been reaping the rewards ever since.

Between 1957 and 2007, Philip Morris was the single highest-returning stock in the United States. A $1,000 investment in Philip Morris in 1957 would be worth about $5.8 million today.

Although Altria’s (MO) returns are the best in the business, other tobacco companies have performed almost as well. Even today, amid declining smoking rates in the U.S., tobacco companies continue to outperform other equities.

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Take a look at the performance of the Datastream Tobacco index since 1973. As you can see, the index has maintained an amazingly consistent 15% annualized growth rate for most of its history.

And more importantly right now, downturns in the tobacco sector do not seem to correspond with market downturns.

Tobacco Is Alive and Well in the U.S.

I’m not saying tobacco companies can’t correct… In 1999, the tobacco index fell by a precipitous 60%. But the stocks were back at new highs a year later…

The fall came after the index was selling for a relatively high 23 times earnings. The companies had settled a number of lawsuits in 1998, and investors were optimistic. After an adverse court ruling in Florida, the index fell down to a P/E of 6.1.

The constant risk of litigation is why this sector is usually so cheap, with a median P/E of 13. But right now, it’s relatively pricey…Although well below all-time highs, the tobacco index is selling for 15 times earnings (18% above its median). Investors are probably bidding these stocks up, cashing in on their reputation for being a safe haven in a tough market.

With these valuations, I wouldn’t hop on tobacco right now for a short-term trade. But as you can see, the sector has always been a good long-term hold.

Good investing,

Ian Davis

P.S. In 1985, Philip Morris changed its name to Altria Group. Then earlier this year, Altria spun off Phillip Morris International to focus on the U.S. market.

Right now, Altria is the most expensive cigarette by price to earnings. Historically, Reynolds American (RAI) and UST have held this honor. Apparently, investors liked the spinoff and have bid up Altria’s stock price accordingly.

Reynolds American is currently the cheapest tobacco company in the Datastream index. It is trading at a P/E of 10.2, about 29% below its median.

But if the central bank does pare short-term interest rates, it’s likely to be the last such move in awhile; the Fed will take a break and give its rate cuts a chance to work their way through the U.S. economic system.

Despite an active-economic-calendar schedule this week – which includes a report on first-quarter gross-domestic product, and several other statistics that could confirm that the U.S. economy is entrenched in a recession – the Fed’s machinations should dominate this week’s headlines, given that the central bank’s interest-rate-setting arm is set to meet Tuesday and Wednesday.

Any announcements about interest rates will be made at 2:15 p.m. Wednesday. Experts also say that whatever the Fed says about its expectations will be just as important as what it actually does to the benchmark Federal Funds rate.

“I don’t think there’s any question that they’ll cut [a quarter-percentage point] off the rate,” David Rosenberg, chief economist for Merrill Lynch & Co. Inc. (MER), told The International Herald Tribune. “The real question is what they say about the future. It won’t be an ‘all clear’ signal. But they’ll find a way to tell the markets that they’ve done enough for now, simply put.”
Not everyone agrees.

“There is no reason why the Fed should be cutting rates right now,” Richard Yamarone, director of economic research at Argus Research Corp., told MarketWatch.com.

Yamarone may be thinking back to some of the public comments certain of the central bankers themselves have been making.

Back on April 18, Fed officials hinted that they would be reluctant to cut the benchmark Federal Funds rate yet again, given that the slumping U.S. economy also faced a major inflationary threat. Indeed, Philadelphia Fed President Charles Plosser warned against believing that interest-rate cuts were “the solution to most, if not all, economic ills.”

Plosser is one of the Fed’s major anti-inflation hawks At the time, Plosser was merely the latest in a string of policy-makers to warn about the rising risks of inflation, essentially suggesting that another rate cut would probably be a very tough sell.

In a speech at Drexel University’s LeBow College of Business in Philadelphia, Plosser said real interest rates were now at “an accommodative level, meaning borrowing costs were low enough to start boosting the U.S. economy’s growth rate back toward its normal historical norm, Reuters reported.

The futures market is projecting a Fed Funds rate of 1.75% by the end of this year. Here’s a look at the futures market’s month-by-month expectations for short-term borrowing costs for the remainder of 2008:

• April: 2.17%.
• May: 1.89%.
• June: 1.85%
• July 1.79%.
• August 2008: 1.76%.
• September 2008: 1.76%.
• October 2008: 1.77%.
• December 2008: 1.73%.

The worries about inflation that Plosser and other inflation hawks have are very real. And those concerns don’t exist solely on our side of the Atlantic. The low U.S. rates are contributing to a weakness in the greenback that’s sent the American currency to record lows against most other key world currencies. That’s fueling a massive run-up in the cost of energy and food-related imports – and that’s inflationary for U.S. buyers.

But it’s made U.S. exports very competitive abroad, acting almost as a big discount for foreign buyers of such wares as Boeing Co. (BA) jetliners. In fact, just last week Boeing surprised Wall Street with record earnings and announced a record order backlog. And pan-European arch-rival Airbus SAS., was forced to announce a price increase on several  of its commercial airliners – because of rising steel prices and because of the falling dollar.

French Economy Minister Christine Lagarde yesterday (Sunday) that the gap between the U.S. and Eurozone interest rates was way too large, and called for a change in rate policies on one side of the Atlantic, or the other.

“We are in a delicate situation where we have, on the one hand, an American Federal (Reserve) which has a policy of very low rates and a European Central Bank which has maintained high interest rates,” Lagarde told LCI Television and RTL Radio, the global wire service Reuters reported. “The differential in interest between the two, it seems to me, is a little too big at the moment.”

Paris has long been a vocal critic of what French President Nicolas Sarkozy has termed the ECB’s overly narrow focus on fighting inflation – and has previously been criticized by Germany for meddling in the business of the “independent” central bank.

With Eurozone inflation running at about 3.6% – its highest rate since the measure for that portion of the European market began in 1997, the European Central Bank (ECB) has left its key refinancing interest rate unchanged at 4.0%, despite some very definite signs that Eurozone growth is slowing.

By comparison, the key U.S. interest rate is at 2.25%, though it may be heading lower this week, and inflation is “officially” said to be at right about 4% – though such experts as Money Morning Contributing Editor Martin Hutchinson believe the actual U.S. inflation rate is actually much higher.

Although the FOMC meeting is likely to top the economic the economic news of the week this week, the GDP report will come in a fairly close second and will be nearly as closely watched by some experts. The reason: Many eternal pessimists are expecting the report to show negative growth during that three-month period.

Why is that important? Simple: According to the National Bureau of Economic Research (NBER), two consecutive quarters of negative growth constitutes a recession.

Most folks “feel” like the U.S. economy is already in a recession. An official designation by the NBER – which usually comes well after the fact – would simply make it official.

In the meantime, some of these other reports this week could help serve as an interim and unofficial “confirmation” of that dour diagnosis of the U.S. economy:

• The health of the manufacturing sector will get a solid assessment via Thursday’s release of the much-watched ISM survey and Friday’s report on factory orders.
• The all-important U.S. labor markets will get significant scrutiny via Thursday’s report on initial jobless claims and Friday’s reports on the U.S. unemployment rate and on non-farm payroll data.
• We’ll get a bit more insight into the psyche of the American consumer with Tuesday’s report on consumer confidence for the month of April and Thursday’s report on personal income and spending for the month of March.
• And we’ll get an overview of Corporate America’s health, as U.S. energy giants Exxon Mobil Corp. (XOM) and Chevron Corp. (CVX) reveal how their profit reports have been boosted by record energy prices [likely also prompting new calls for Congressional investigations into allegations of price gouging].  Starbucks Corp. (SBUX) will follow up recent warning with an actual announcement, while Office Depot Inc. (ODP) and Radio Shack Corp. (RSH) will give investors a look inside the world of retail.

Market Matters

Two weeks ago, investors disregarded any semblance of bad news (and lately, there has been plenty) and instead took the stock indices to their highest levels in months. Last week, investors allowed the earnings releases to guide their trading activities while awaiting the Fed’s interest-rate decision and commentary.

So just what did the recent earnings reports say about the current state of Corporate America?

Financialscontinue to stoke the negativity (no surprise there) with Bank of America Corp. (BAC), investment banker Credit Suisse Group (CS), and bond insurer Ambac Financial Group Inc. (ABK) reporting more disappointing results.  Drugmakers, on the other hand, enjoyed a nice quarter with Merck & Co. Inc. (MRK) and Novartis AG (NVS) beating expectations.  While a sluggish economy can’t keep folks out of McDonald’s Corp. (MCD) (as least in its international markets), it does seem to be impacting coffee intake as Starbucks warned that this week’s results (and those for all of 2008) will miss earlier projections.  Of course, dire times lead to more nervous smoking (and higher cigarette sales) as happy Philip Morris International Inc. (PM) shareholders found out this quarter.  While cost-conscious folks stayed home and watched more DVDs, Netflix Inc. (NFLX) warned that future subscriber growth may be limited.

Both Delta Air Lines Inc. (DAL) and Northwest Airlines Corp. (NWA) posted sizable losses on skyrocketing fuel costs, leading some analysts to question the wisdom behind the proposed merger. While the world’s largest shipper, United Parcel Service Inc. (UPS), experienced a jump in profits, management expressed concern about the quarters to follow, since consumers just don’t seem quite as interested in finding out “what Brown can do for you.”  Even techs, which previously had been a savings grace for the market, turned pessimistic this week.  Apple Inc. (AAPL) and Texas Instruments Inc. (TXN) reported decent earnings, but warned about their respective outlooks.

Likewise, high-tech bellwether Microsoft Corp. (MSFT) disappointed with its profit numbers, while investors wait with trepidation to see what becomes of Microsoft’s bid for Yahoo! Inc., (YHOO). Meanwhile, Yahoo beat “The Street’s” expectations. However, the three-week deadline that Microsoft gave Yahoo to come to an agreement on its unsolicited bid passed Saturday without any announcement from either side, leading to the possibility that the battle for Yahoo is about to turn hostile, MarketWatch.com reported.

ConocoPhillips (COP) showed that record energy prices are not hurting everyone, as the No. 3 U.S. oil company reported a 17% increase in profits.

Transactions typically imply growing confidence in corporate boardrooms as management finds the value in certain acquisition targets.  Last week, News Corp. (NWS.A) moved closer to buying Newsday and giving Rupert Murdock greater control over the New York press.

Insurance giant Liberty Mutual Holding Co. Inc. agreed to buy SAFECO Corp. (SAF) in a $6.2 billion deal that will create the 5th-largest property and casualty firm.  Triarc Cos. Inc. (TRY) soon may be adding those terrific “hot-and-juicy” square burgers and addictive Frosty drinks to its Arby’s roast-beef-sandwich menus as it looks to acquire Wendy’s International (WEN) in a deal valued at $2.34 billion. And, of course, there’s still the Microsoft-Yahoo proposal.

With a mixed week on the earnings front, stocks traded relatively flat as investors took some profits from last week’s newfound bullish sentiment, while still searching for a bargain or two.

Economically Speaking

For many Fed-watchers, the prospect for another rate cut has been a foregone conclusion.  After all, central bank Chairman Ben S. Bernanke and clan have let their creative juices flow [not to be confused with the creative juices of those Wendy’s hamburgers] over the past few months; the Fed has tried everything from the aggressive rate-cutting campaign to liquidity injections to arranging the buyout of The Bear Stearns Cos. Inc. (BSC) by JPMorgan Chase & Co. Inc. (JPM).

Suddenly, some great prognosticators believe the Fed may be “seven and done” as they drop the Federal Funds rate again (by a minimal quarter of a percentage point this time around) – before going on a “summer hiatus” to give their earlier work the time to take effect.

With oil prices hovering around the (once unheard of) $120/barrel level, some policymakers are sure to claim that inflation should be considered as critical a concern as the sluggish housing market to the U.S. economy’s health. Indeed, comments such as those of Philly Fed President Plosser make it clear that inflation is already becoming an increasingly important consideration.

Additionally, the European Central Bank seems content to keep its lending rate at 4%, so further Fed actions will continue to have devastating impact on the value of the dollar.

The economic calendar was relatively light last week as analysts rested up for this week’s vast array of important data. After a surprising climb (better known now as an aberration) in February, existing home sales plunged again in March, while new homes sales fell to their lowest level in more than 16 years.

Furthermore, the median price of a new home dropped by more than 13% last month, the largest such decline in almost four decades.

Durable goods orders fell in March, as well, although once the volatile transportation sector was removed from the equation, the results did not look half bad.

We hope that investors and analysts got plenty of rest over the weekend to get ready for the bustle of economic reports due throughout this week. Talk of recession should resume with the release of the first-quarter GDP, which many eternal pessimists believe will show negative growth during that three-month stretch.

Weekly Economic Calendar

“In general, spin-offs let the markets more accurately value the operations separately,” says Louis Basenese, editor of The Takeover Trader. “So it’s important to know the parent companies’ motivation. Are they divesting underperforming assets to revive the parent stock, or breaking out quickly growing operations being held back? In my experience, if you stick to spin-offs of the latter, you’ll be handsomely rewarded.”

There are many reasons a corporate parent might decide to spin-off a subsidiary. And as Basenese said, the parent’s motivations are key to making good investment picks. Here are some examples of investor-friendly reasons for a spin-off:

• Streamlining or consolidating business operations.
• Tying management performance more closely to the subsidiary’s performance.
• Freeing a subsidiary that is being held back by the parent corporation’s regulatory environment or other factors.

There have been numerous studies done on how spin-offs tend to outperform the market as well, if not better, than their former corporate parents. According to a study titled “Restructuring Through Spinoffs,” published in 1993 by Penn State University, spin-off companies outperformed peers and the S&P 500 Index by approximately 10% per year in the first three years after the initial spin-off.

The study, which looked at 25 years of market history, also found that parent companies outperformed peers by more than 6% the year after the spin-off.

A 1999 McKinsey study of 168 corporate restructurings showed that spin-offs substantially outperformed the market. The McKinsey study of companies spun off between 1988 and 1998 showed that the new firms had a two-year annualized total return to shareholders of 27%, versus 14% for the Russell 2000 and 17% for the S&P 500.

Spin-offs tend to outperform because investors often sell when they receive stock in a new company they never intended to own, keeping share prices low initially. Also, index fund managers sell off spin-off shares if the new company is not added to the original parent company’s index. Institutional fund managers will also sell spin-off shares due to lack of liquidity or dividend.

At the same time, management’s performance will have a greater impact on the shares of the spin-off than it had on the parent company, often spurring greater efforts to innovate and succeed.

A Spin-Off that Streamlines

If someone asked: What fast-food company is the world leader in terms of total restaurant locations? Most people would probably guess McDonald’s Corp. (MCD), but the correct answer is fast-food rival Yum! Brands Inc. (YUM), with 34,000 locations.

Yum is the proprietor of such well-known brands as KFC, Pizza Hut, Taco Bell, Long John Silver’s and A&W All-American Food Restaurants. Yum also has East Dawning, an Asian-markets chain operated by its Yum! Restaurants International (YRI) division.

The former PepsiCo. Inc. (PEP) subsidiary was spun-off in 1997 under the name Tricon Global, which was later changed to Yum in 2002. In the words of one PepsiCo executive, “restaurants weren’t our schtick,” The Economist reported.

Freed from the beverage giant corporate parent, President and CEO David C. Novak was able to develop economies of scale across Yum’s various restaurant brands. Prior to the spin-off, the chains had acted more like competitors. But Novak was able to unify the various lines and put their combined purchasing power to work to score better terms from suppliers.

Novak also centralized advertising for the chains. Dual locations, where products from two chains were offered at the same location, were opened. Such innovation helped push Yum to the top the fast food industry and have allowed Yum shares to increase almost 400% from its 1997 spin-off.

That growth has been due in large part to a successful overseas strategy. Yum has done exceptionally well in China, where most consumers think of KFC when they think of chicken. And now the company is planning to expand further into India, another emerging market with a rapidly growing middle class.

Yum plans to open several Taco Bell locations in India in the latter half of 2008. India’s Economic Times reported that Yum, which already has KFC and Pizza Hut locations in India, plans to double its revenues from India in the next three years, with most of this growth coming from Taco Bell.

Yum also has been pushing to increase domestic sales by revamping U.S. menus, increasing breakfast options, and reducing company ownership through a re-franchising program of its KFC and Pizza Hut brands, The Associated Press reported. And it looks like that hard work is starting to pay off.

UBS AG (UBS) recently upgraded Yum shares to a “Buy” from “Neutral.” In a note to clients, analyst David Palmer said “while some investors have expressed concerns that the U.S. re-franchising appeared to slow versus company guidance in 2007, we expect to see that trend reverse in 2008 and 2009.”

“We believe the end result for Yum will be a faster-growing, more-international, higher-return company by 2010 – with 40% or more of its enterprise value coming from its rapidly growing China business,” Palmer added.

Yum shares have traded between $28.37 and $40.60 in the past 52 weeks. Yesterday (Tuesday), shares closed at $38.06.

]]> http://www.contrarianprofits.com/articles/outperform-the-market-with-spin-offs-2/1314/feed 0 http://www.contrarianprofits.com/articles/a-contrarian-strategy/2010 http://www.contrarianprofits.com/articles/a-contrarian-strategy/2010#comments Mon, 07 Apr 2008 20:42:56 +0000 Floyd Brown http://www.contrarianprofits.com/articles/a-contrarian-strategy/2010 The Investment U e-Letter: Issue #783
Monday, April 7, 2008

A Contrarian Strategy: Why Clear Channel Is Today’s Top Stock Pick
by Floyd G. Brown, Advisory Panelist, Investment U

One of the most profitable investments I have made came after a magazine headline hailed the coming bankruptcy of Philip Morris. It took nerves of steel to buy the lowly MO in those days. It was after the largest legal settlement in U.S. history disgorged Morris and other tobacco stocks of profits to pay the healthcare bills of the 50 different United States. Attorney General Janet Reno attacked the company in the newspapers as merchants of death.

But in the eight years since I first bought Philip Morris, at around $19 a share, I have been paid a…

]]> The Investment U e-Letter: Issue #783
Monday, April 7, 2008

A Contrarian Strategy: Why Clear Channel Is Today’s Top Stock Pick
by Floyd G. Brown, Advisory Panelist, Investment U

One of the most profitable investments I have made came after a magazine headline hailed the coming bankruptcy of Philip Morris. It took nerves of steel to buy the lowly MO in those days. It was after the largest legal settlement in U.S. history disgorged Morris and other tobacco stocks of profits to pay the healthcare bills of the 50 different United States. Attorney General Janet Reno attacked the company in the newspapers as merchants of death.

But in the eight years since I first bought Philip Morris, at around $19 a share, I have been paid a king’s ransom. The stock has yielded over 10% annually. I’ve seen MO’s dividends rise. The company has given me shares of Kraft (NYSE: KFT), worth more than my original purchase price. It gave me shares of Philip Morris International (NYSE: PM) this month. And for the icing on the cake, I still own all my original shares of Altria (NYSE: MO).

Why am I telling you this?

Because it says a lot about headlines in the mainstream media. They almost always get the story wrong. In this case, they were trumpeting the potential bankruptcy of Philip Morris just when the stock was cheap enough to be a long-term buy and part of my overall contrarian strategy.

Contrarian Strategies: How to Find Wall Street’s Best Deals

When markets are hot, contrarian strategies go the other way, toward the cool spots. Contrarian investors prefer to skulk around in broken sectors looking for the next Philip Morris – the next company that will pay out handsomely to hold their stock because no one else will buy it.

That’s why I enjoyed the headlines around the recent collapse of the Clear Channel deal. This one appeared in Fortune magazine: “Clear Channel’s Prospects Look Grim.”

The article continues by telling us why the radio business is dead. Then, for good measure, it tells us why the newspaper business is holding on for dear life and why the TV business is at death’s door.

The article leads you to believe there’s simply no hope for the media business. And when there is no hope, I sense opportunity for a contrarian strategy.

Let me make a prediction…

• After I die (and I am only 47 years old) people will still listen to radio, they will still read newspapers and they will still watch TV.
• By the way, similar prognosticators said the same of the movie and radio businesses when TV was invented.
• They both still exist… even after the Internet has come along and led to the prediction of an end to all these businesses.
• These media businesses will not only change, but adapt.

The winds of Creative Destruction are blowing, as Joseph Schumpeter would say, but the best businesses adjust and change with those winds. Right now, I see remarkable value in the media space. So let’s look at the numbers instead of the headlines…

4 Media Firms To Consider In Any Contrarian Strategy

Clear Channel (NYSE: CCU), with its “grim prospects,” grew revenues 5.5% last year. How many businesses do you know of on the verge of disappearing that are growing revenue? Granted, the revenue from radio was shrinking – by about 2%. But Clear Channel has 870,000 billboards scattered across the landscape and this business is booming. New technology, which allows billboards to change messages by the minute, is powering a revival in display advertising.

The operating margins in this business are 25%. All Clear Channel has to do to see clear sailing ahead is do what the private equity buyers would do. They would slash expenses, besides selling underperforming assets. Then they would take the money, pay down debt, or give themselves a hefty dividend.

Now, how tough can that be? I expect that they could fetch $8 or $9 billion for the outdoor advertising business alone. That single transaction could pay every last dollar of Clear Channel’s debts. The reason private equity firms wanted Clear Channel is because they smell profits. At 15 times earnings, and with the best assets in radio, Clear Channel below $30 a share is a steal.

Other media firms I think deserve a look are:

• Gannett (NYSE: GCI),
• Citadel (NYSE: CDL),
• And Time Warner (NYSE: TWX).

As the Olympics and Election of 2008 draw closer, these firms will show increasing earnings and depressed growth will rebound.

Radio is a “drive time” phenomenon, and drive times are increasing on our already congested roads. All four companies own outstanding assets and should flourish in the Internet era. Major media firms own some of the best Internet assets besides having the ability to tailor the news to local interests.

When the markets turn, the oversold stocks of media firms are going to come roaring back with a vengeance.

Good investing,

Floyd

Floyd Brown, a regular contributor to Investment U and The Oxford Club, began his highly successful investing career while still in high school… and made his first million before turning 30. Here are five more of his energy picks.

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