Source: Philip Morris International.
Tobacco stocks have traditionally been a great place for dividend investors to find high yields, with the industry having avoided numerous worst-case scenarios over the decades and generating ample cash flows from which to make generous dividend distributions. Even though Philip Morris International (PM 1.39%) has only been a separate entity for a short time, its legacy as a spinoff from former parent Altria Group (MO 0.12%) lends Philip Morris the reputation for reliable income that Altria has demonstrated for decades.
Philip Morris International's worldwide focus gives it a different look from Altria and fellow domestic tobacco producers Reynolds American (RAI) and Lorillard (LO.DL), as different areas around the world have different attitudes about smoking and tobacco use. Yet despite many investors hoping that Philip Morris would get a free ride in expanding across the globe, many foreign countries have followed the lead of the U.S. in weighing heavier regulation on smoking and tobacco use. Still, Philip Morris has plenty of opportunities for growth. Let's look at three reasons why Philip Morris International has already become a top dividend stock in its field.
1. Philip Morris International has roared out of the dividend gate with fast payout growth.
Philip Morris didn't waste any time in looking to catch up to Altria's dividend-growth path, with regular, steady boosts to its payout resulting in quarterly dividends more than doubling since 2008. Share prices have soared in the interim as well, so even with that dividend growth, Philip Morris International's yield has only inched higher during that six-year period. In early 2008, Philip Morris yielded about 3.7%, compared to a 4.7% yield today.
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One minor concern, though, is that Philip Morris International didn't boost its dividends as much in 2014 as it did in previous years. The jump to an even $1 per share quarterly marked a milestone for the company, but it represented just a 6% rise, compared to increases of 10% in each of the two previous years and 20% in 2011. Nevertheless, after such a quick start, it's reasonable for Philip Morris International to see its growth rate slow at least temporarily.
2. A strong dollar has held back Philip Morris International, but under more normal conditions, the company could accelerate its dividend growth.
One possible reason why Philip Morris slowed its dividend growth this year is that currency headwinds have held back the tobacco giant's earnings growth. With Philip Morris getting more than 60% of its revenue from the Asian and European regions, the poor performance of local currencies like the Japanese yen and the euro against the dollar have had a negative impact on earnings per share. In its most recently reported quarter, Philip Morris said that a strong dollar cost the company more than 10% of its earnings per share for the quarter, and revenue in dollar terms dropped even as currency-adjusted sales climbed.
Source: Philip Morris International.
With Europe in or near recession and Asia seeing pressure from slowing growth in China and high taxes in Japan, the U.S. dollar's strength could last well into the future. Over longer periods of time, though, currency impacts tend to even out, and if the dollar eventually weakens, it could help restart Philip Morris International's dividend growth.
3. Even under tough conditions, Philip Morris has room to raise its dividend.
Although macroeconomic conditions haven't been ideal for Philip Morris, the good news for investors is that the tobacco company still has some room to raise its dividend in the future. Currently, Philip Morris pays out about 75% of its earnings in dividends, and while that's higher than many dividend stocks in the market, it nevertheless leaves some margin for further increases even if earnings don't start to grow as quickly as investors hope.
Currently, though, most investors expect Philip Morris International's earnings to rebound next year. As the headwinds from adverse currency impacts start to lessen, shareholders could see growth initiatives start to pay off more visibly for the company.
Philip Morris International has some big shoes to fill as it seeks to follow in its former parent's footsteps. In time, superior growth prospects abroad could help Philip Morris surpass Altria as a shareholder-friendly dividend stock.
