Philip Morris Is Scaling Back Investor Returns

Philip Morris (NYSE: PM  ) , recognized as one of the most profitable companies in the world, has long been known for its impressive shareholder returns.

Since the end of 2009, Philip Morris has returned around $44 billion to investors through both buybacks and dividends. This figure works out at around $24 per share, based on the number of shares in issue from the end of 2009.

A problem
There is a problem with this heavy-handed approach to investor returns. While Philip Morris has been accelerating returns recently, the company is now being forced to scale back its buyback plans as the company has been spending more than it can afford.

Meanwhile, Altria (NYSE: MO  ) , Philip Morris' domestic peer, is now talking about ramping up buyback spending after years of lackluster buybacks despite impressive dividend payouts.

Management are cautious
The best way to describe Philip Morris' new found fiscal prudence is to take an excerpt from the company's presentation to the Consumer Analyst Group of New York Conference at the beginning of this year :

"...We spent $2.3 billion on these four business development initiatives. Last year we spent $6 billion on share repurchases and our outlay on dividends was $5.7 billion. As a result, on our cash outflow was $14 billion. Our free cash flow in 2013 increased by $990 million to $8.9 billion...This translated into net financing requirement of $5.1 billion ...our total debt last year by $4.8 billion to $27.7 billion..."

"...We're intent on maintaining our single A credit rating and recognize that we're approaching the high-end of ratio and supporting it... to scale back our share repurchase target to $4 billion in 2014. We are committed to share buyback and our operating corridor is defined on one side by the upper limit of our credit rating and on the other side by providing 100% of our free cash flow to our shareholders through dividend and share buyback. We intend to operate within this corridor in the future...."

It would seem as if Philip Morris intends to reduce its share buybacks in the future in order to maintain a stable credit rating.

Back in the U.S.
Philip Morris is one of the few companies that looks after its shareholders this well. Even after scaling back buybacks to around $4 billion per annum, the company will still be chucking out more cash than Altria is returning via dividends. Altria's cumulative dividend payout cost the company $3.6 billion for 2013, and $3.4 billion for 2012.

Altria's management is also somewhat against buybacks, instead favoring hefty dividend payouts. Altria has only spent a little under $2 billion on repurchases during the past two years. During the same period, the company has generated upwards of $8 billion in operating cash flow.

However, there are indications that the company could be gearing up for greater repurchases. On Altria's first quarter conference call, analyst Chris Gowe asked management if they planned to ramp up repurchases this year as free cash flow improved. Altria's management responded that:

"...our normal practice has been that most of the cash returned to shareholders come through our 80% dividend payout ratio but opportunistically we'll do some share repurchase. So additional share repurchase is sure to be a discussion topic here over the next several months...So, certainly use of cash for something, we'll be looking at over the next few months ..."

With those comments in mind, it would appear that Altria's management is contemplating bigger buyback plans. This is great news for shareholders who are already profiting from the company's hefty 4.7% dividend yield.

Foolish summary
After several years of spending more than it can afford on buybacks and dividends, Philip Morris has finally decided to reign in returns. Even though the company will be spending less on buybacks, it is still likely that the buybacks will continue to cost the company several billion per annum. 

On the other hand, Altria, a company reluctant to spend on buybacks, is considering a new, bigger buyback plan. That's great news for investors. 

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