Dividend investing is a tried-and-true strategy for generating strong, steady returns in economies both good and bad. But as corporate America's slew of dividend cuts and suspensions over the past few years has demonstrated, it's not enough simply to buy a high yield. You also need to make sure those payouts are sustainable.
Let's examine how Philip Morris International (NYSE: PM ) stacks up. In this series, we consider four critical factors investors should examine in every dividend stock. We'll then tie it all together to look at whether Philip Morris International is a dividend dynamo or a disaster in the making.
1. Yield
First and foremost, dividend investors like a large forward yield. But if a yield gets too high, it may reflect investors' doubts about the payout's sustainability. If investors had confidence in the stock, they'd be buying it, driving up the share price and shrinking the yield.
Philip Morris International yields 4%, considerably higher than the S&P 500's 2.1%.
2. Payout ratio
The payout ratio might be the most important metric for judging dividend sustainability. It compares the amount of money a company paid out in dividends last year to the earnings it generated. A ratio that's too high -- say, greater than 80% of earnings -- indicates that the company may be stretching to make payouts it can't afford, even when its dividend yield doesn't seem particularly high.
Philip Morris International has a comfortable payout ratio of 55%.
3. Balance sheet
The best dividend payers have the financial fortitude to fund growth and respond to whatever the economy and competitors throw at them. The interest coverage ratio indicates whether a company is having trouble meeting its interest payments -- any ratio less than five is a warning sign. Meanwhile, the debt-to-equity ratio is a good measure of a company's total debt burden.
Let's examine how Philip Morris International stacks up next to its peers:
|
Company
|
Debt-to-Equity Ratio
|
Interest Coverage
|
| Philip Morris International |
486% |
14 times |
| Altria |
368% |
5 times |
| Reynolds American |
55% |
11 times |
| Lorillard |
N/A |
16 times |
Source: S&P Capital IQ. N/A = not applicable.
Cigarette-making is an incredibly stable industry that's subject to lawsuits, so producers tend to pay big dividends and operate with very little equity. Philip Morris International, as well as its former parent company, Altria, has huge debt-to-equity ratios, while Lorillard actually has negative equity. Still, the business is profitable enough that it's easy to support their interest payments.
4. Growth
A large dividend is nice; a large growing dividend is even better. To support a growing dividend, we also want to see earnings growth.
|
Company
|
5-Year Annual Earnings-per-Share Growth
|
5-Year Annual Dividend-per-Share Growth
|
| Philip Morris International |
13%* |
39%* |
| Altria |
2% |
(14%) |
| Reynolds American |
2% |
10% |
| Lorillard |
15% |
0% |
Source: S&P Capital IQ. *3-year growth.
Altria and Reynolds lag Philip Morris and Lorillard in the growth department, both over three- and five-year periods. For Philip Morris, the heavy growth opportunities are coming from various emerging economies in Asia and Latin America, as well as Eastern Europe, the Middle East, and Africa. Lorillard actually has managed to boost sales growth in the U.S.
The Foolish bottom line
Philip Morris International certainly looks like a dividend dynamo. It exhibits a fairly strong dividend bill of health. It has a high yield, a moderate payout ratio, a manageable debt burden, and growth to boot. If you're looking for some other great dividend stocks, I suggest you check out "Secure Your Future With 11 Rock-Solid Dividend Stocks," a special report from The Motley Fool about some serious dividend dynamos. I invite you to grab a free copy to discover everything you need to know about these 11 generous dividend payers -- simply click here.
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