Phillip Morris Part II Phillip Morris International as discussed in part one of this paper series is "the leading international tobacco company with products sold in over 180 countries" (Phillip Morris International. About Us. 2011). The organization concerns itself with a dual track philosophy "provide high quality and innovative products to adult smokers, and reduce the harm caused by tobacco products" (Phillip Morris International. Company Overview. 2011). While in many ways there is a certain cognitive dissonance to this corporate mission; the firm has been successful in generating quality outcomes for their shareholders with "total shareholder return (TSR) for the year 2010 a strong 27.2%, well ahead of their peer group (up by 8.7%) and the S&P 500 (up by 15.0%)" (Phillip Morris International Annual Report. 2011.). The company's success stems from their ability to generate consistent operating cash flow which is used for a variety of purposes including: logistics, supply chain management, stock buybacks, and most importantly critical investments, setting the foundation for sustainable growth into the future. An analysis of two specific investments: a current purchase which allowed for a "highly successful business combination with Fortune Tobacco Corporation in the Philippines" (Phillip Morris International. Annual Report. 2010.); and a transaction securing the patent rights for an innovative cigarette substitute to drive future profitability, limn the importance of PMI's capital expenditures (Phillip Morris International. Press Release. 2011).

Long-Term Investment: Nicotine-Contained Aerosol

As discussed in part...

Press Release. 2011). The development of innovative new products for PMI consumers is the foundation for generating dependable and forecasted cash flow streams which can be discounted to their net present value. The purchase of the patent stemmed from "discretionary cash flow, defined as operating cash flow less capital expenditures, of $8.7 billion in 2010, up by $1.6 billion, or 21.7%, versus 2009" (Phillip Morris International. Annual Report. 2010.). In total PMI made "capital expenditures of $713 million in 2010, primarily for the modernization and consolidation of manufacturing facilities, expansion of research and development facilities, and expansion of production capacity" (Phillip Morris International. Annual Report. 2010.). R&D under which the patent purchase for substitute cigarette technology falls plays a critical role in PMI's ability to generate new product lines not only in tobacco but also for tobacco alternatives. The investment is considered long-term in this case because there is no certainty that a profitable generating product will emanate from the capital spending, or if it does how long the payback period will be and what the return on investment will be. Nevertheless the company's R&D mission is to "develop products with the potential to reduce the risks of smoking-related diseases" (Phillip Morris International. Company Overview. 2011) which should in the…