Irving Fisher’s “The Money Illusion” is a life-changing economic treatise because it strongly advances the principle of thinking in terms of purchasing power rather than nominal dollars. We all have the intuitive sense to recognize this over long periods of time, as we know when we hear stories of grandpa making $1 per day or buying five-cent milk shares.
We are less cognizant of this over the intervals of our own life. If you have a $500,000 collection of investment assets, and inflation runs at 3.5% per year, you must have $517,500 in total at the end of a twelve-month period in order to maintain the status quo. How many people would correctly observe that their purchasing power had diminished if their account stated $515,000 at the end of the period? Not many.
In that spirit, I have paid attention to an unlikely source to gauge metrics of purchasing power–prisoners. One of my friends, who is a public defender, has been astounded by the number of cigarettes and tide pods that circulate as currency proxies in jailhouses in rural Missouri.
I regard that information as more than an interesting anecdote. The people who have the greatest need for bounded utility have identified two items that hold up against inflation well. Since 1982, the price of cigarettes have increased by 5.5% annually (compared to 3.2% annually). Since 1992, the price of detergent has increased by 5.2% annually (compared to 3.3% annually). It sounds bizarre, but aside from the perishability issue, if you held cigarettes and detergent for an extended period of time, and the market was highly liquid and rational, your purchasing power would remain intact at that future date.
Personally, I think now is a great time to act on that insight and apply it to Philip Morris International (PM), which sells Marlboros, Chesterfields, and Parliaments in every country in the world except the United States (because Altria holds the right to sell those brands in the USA).
At the current price of $78 per share, Philip Morris yields 5.8%. There is an extended track record, based both on Philip Morris’ cigarette price hikes and the historical results in the business that suggest future price hikes of 5% per pack each year. The distinction between Philip Morris International is that Philip Morris International sells 1-3% more cigarettes per year whereas Altria sells 1-3% less per year.
The result? Someone who buys Philip Morris International at a yield point of 5.8% stands to benefit from 6-9% earnings per share growth for total returns of 11.8% to 17.8% over the coming five years. It is firmly in that position that Dr. Jeremy Siegel analyzed in explaining why the historical Philip Morris became the best American investment of the latter half of the 20th century.
For those who buy Philip Morris right now and reinvest their dividends, I do not think a multi-year period of 20% annual returns is out of the question (note: I am not saying this is likely, but I am saying that if the best case scenario were to manifest itself, this the upper bounds of what could happen).
Further, my expectation is that Philip Morris International will pay out over $25 per share in total dividends over the next five years. In other words, over the relatively short medium term, there is a realistic possibility of getting $0.33 on every dollar invested back even if one does not reinvest. Now might be a good time to cross-reference Dr. Jeremy Siegel’s analysis of the old Philip Morris in his classical treatise “Stocks for the Long Run” and act upon the marked similarities between Philip Morris International right now and the circumstances that propelled its late 20th century investment returns. History is rhyming.