Source: Philip Morris.

It hasn't been an easy year for Philip Morris International (PM 0.31%). The company's revenue and profit have taken it on the chin thanks to the brutal effects of foreign exchange fluctuations. This has suppressed its stock price; shares of Philip Morris International are down 2% in the past year. Philip Morris' declining stock price has elevated its dividend yield to nearly 5%.

And yet, some are predicting Philip Morris will push its dividend even higher in the coming weeks. A recent post in Barron's highlighted a report from Wells Fargo analyst Bonnie Herzog, who is expecting Philip Morris to increase its dividend at least 5% in the coming weeks.

It might sound crazy to suggest Philip Morris will be raising its dividend given its underlying struggles, but here's why the prediction isn't as wild as it seems.

A year to forget
Philip Morris' headline numbers have looked extremely weak this year. Net revenue fell 12% last quarter, year over year, as cigarette shipment volumes fell 1.4%. Over the first half of the year, adjusted earnings per share declined 8.8% versus the same period in 2014. The biggest culprit for these declines is foreign exchange. Unfavorable currency fluctuations caused Philip Morris' revenue to decline by $1.3 billion just last quarter.

With such poor top- and bottom-line performances in recent periods, it does not seem Philip Morris could increase its dividend, considering it is already such a high yielder. But here's why Herzog, a managing director and beverage & tobacco analyst at Wells Fargo Securities, sees the potential for a raise, even under such difficult circumstances.

The Barron's post highlights a few reasons why Herzog expects Philip Morris to increase its dividend: its superior Marlboro brand, a diverse brand portfolio, and the company's impressive returns on capital.

Bullish on PM
It's certainly true that Philip Morris holds a firm leadership position in its industry. It operates the Marlboro brand in international regions and has leading market share in some key emerging markets. Philip Morris grew share in its top 30 geographic markets by 0.1% last quarter, to 37.5%. In 2014, Philip Morris held the No. 1 or No. 2 positions in 29 out of the 40 largest markets by industry net revenue. Philip Morris' market share exceeds 40% in the European Union and 35% in Asia.

On the subject of new products, the company has new "reduced-risk" products, such as e-cigarettes, that should contribute to future growth. These e-cig products are called iQOS and Marlboro HeatSticks, which were recently introduced in Nagoya, Japan, and Milan, Italy. Management believes these new products offer a unique and more enjoyable consumer experience, as they focus on innovation and product convenience benefits, such as no ash and less smell.

Furthermore, these products heat tobacco rather than burn it, which could be a safer alternative to traditional cigarettes. Preliminary results have been positive enough that the company is planning to take these products nationwide in Italy and Japan this year, with further market releases set for 2015 pending the results.

Free cash flow supports a dividend hike
As a tobacco company, Philip Morris enjoys tremendous free cash flow. The tobacco business is not capital-intensive, which results in a lot of free cash that can be easily returned to shareholders through the dividend. Philip Morris generated $6.5 billion of free cash flow just last year. This was more than enough to cover its dividend, which cost the company $6 billion in 2014. Also, management expects 2015 free cash flow to be roughly in line with last year's free cash flow.

Philip Morris won't buy back stock this year, which leaves a little bit of room for a modest dividend increase. The company could raise its dividend by 5% or so and still cover its payout with free cash flow. As a result, despite its deteriorating headline numbers, it's not inconceivable for Philip Morris to increase its dividend soon.