- Porter's Daily Journal
- Posts
- Good Debt vs. Bad Debt
How Philip Morris Turns Debt Into Brand Value
This is Porter & Co.’s free e-letter, the Daily Journal. Paid-up members can access their subscriber materials, including our latest recommendations and our “3 Best Buys” for our different portfolios, by going here. Recent issues of the Daily Journal are here.
Table of Contents
Three Things You Need To Know Now:
In The Big Secret on Wall Street, Porter & Co.’s flagship publication, we focus on capital efficient stocks. The core of our portfolio is world-class businesses that prioritize returning significant cash to shareholders. In our view, this is the simplest and surest road to permanent wealth. And one of the most important indicators of capital efficiency is return on equity (“ROE”).
Some of our most popular issues of the Daily Journal are those in which Porter leads a masterclass in investment analysis (see, for example, his dissection last week of Google’s recent earnings results – and the comparison of the high-tech titan to a boring old bricks-and-mortar business). Longtime readers will recall one of Porter’s favorite sayings: “There's no such thing as teaching – there's only learning…”
Today, Porter delves into the ways that companies can increase ROE – and in particular, the role of debt. Nicotine company Philip Morris International (NYSE: PM), a stock that we recommended in July 2022 in The Big Secret (the shares are up 75% since then), is one of Porter’s all-time favorite companies… and it has a high level of debt, and negative equity. Porter explains what it all means, and why debt comes in different flavors, in response to a question from paid-up Big Secret subscriber Jay R.
This is from Jay R.:
Hi Porter,
This is my first time writing to you. I am a Big Secret lifetime member and have really enjoyed the six months since I signed up. I’ve learned quite a lot in addition to being thoroughly entertained by your colorful and refreshing writing style. I am new to trying to actively manage my assets (I used to be an S&P 500 indexer, 100%). So, the educational side of what you do is much appreciated.
At any rate, I’ve acted on three of your stock recommendations, including Philip Morris International. That is obviously working out quite well, so….many thanks!
There is one aspect of Philip Morris, however, that is nagging me: its rather large debt load and negative equity. I’m a big fan of Warren Buffett (who isn’t?) and, of course, he’s all about return on equity (“ROE”), as are you. So, it makes me nervous to have a sizable bet on a company, even one with the storied profits history of Philip Morris, with $49 billion in debt (not quite 4x earnings), which includes an $8 billion debt increase since 2023.
I know ROE isn’t everything, and can be “gamed” like any other stat. For example, I suppose Philip Morris could easily have super-high ROE simply by paying down just enough debt to have, say, $2 billion in equity, at which point its ROE would go through the roof, right?
So, I’m just trying to think through the relative importance of its debt and wondered if you have any thoughts, since you have such a high conviction about it?
Jay R.”