For investors, Philip Morris International (NYSE:PM) has been a strong performer, producing total returns of nearly 40% over the past year. After facing substantial challenges from foreign currency impacts and rising regulation overseas, Philip Morris has recently said that it is seeing the dollar's strength moderate somewhat, and it's hopeful that it can produce better financial results in the near future. Yet there are still potential obstacles in Philip Morris' path that could jeopardize its bullish run. Let's look at three reasons Philip Morris International shares could fall in the near future.
1. A disappointing dividend increase could send income investors fleeing.
When it comes to dividends, Philip Morris has built an impressive track record in its short history as an independent company. The tobacco giant started out with a yield of nearly 4%, and since 2008, Philip Morris has more than doubled its quarterly payout. As a result, even with the share price growth that the company has experienced, Philip Morris' dividend yield is still close to that 4% level.
September has traditionally been the time of year that Philip Morris International announces its annual dividend increase, and throughout most of its history, those increases have been impressive. Many dividend hikes have been by double-digit percentages. But in recent years, the pace of dividend growth has slowed, and last year's rise of only 2% showed the struggles that Philip Morris has gone through on the currency front.
This year, Philip Morris still faces challenges, with its dividend currently amounting to 98% of its earnings. That gives the tobacco company little room for growth, and Philip Morris will likely have to decide whether a token increase is adequate to reassure nervous shareholders. Moreover, some might advocate for no dividend increase at all until currency pressures ease, and that could be a huge disappointment for income investors who've come to rely on annual increases in payouts.
2. A renewal of U.S. dollar strength could extend earnings growth weakness.
Much of the optimism over Philip Morris stock has centered on the fact that an end to the strong-dollar trend appears to be in sight. Although recent results have still shown substantial hits to revenue and net income as a result of weakness in foreign currencies, the magnitude of those hits has lessened dramatically. For instance, in its most recent report, Philip Morris announced currency-related impacts that were only between a fifth and a quarter as large as they were in the year-ago period. That favorable trend has motivated Philip Morris to boost guidance for the current year.
However, there's no guarantee that the dollar's recent weakness will persist. Many foreign central banks are pulling out all the stops in driving economic growth, and that has included negative interest rates in some areas of the developed world. By contrast, U.S. investors are increasingly concerned that the Federal Reserve could move to raise rates in the near future, and that might create a new flood of capital from overseas in order to take advantage of greater income opportunities. Capital movements could lead to further dollar gains, and that in turn could bring on another wave of downward pressure to Philip Morris results that could trickle through to its stock price.
3. Reduced-risk studies could fall short of investor hopes.
Philip Morris has pushed hard to develop reduced-risk products that don't have the same potential health impacts as traditional cigarette smoking. Earlier this month, the company released its first scientific update on its research into reduced-risk alternatives. As Philip Morris' chief scientific officer Manuel Peitsch explained, "We are making significant efforts to develop and scientifically assess innovative products that generate a vapor in which harmful chemicals found in cigarette smoke are significantly reduced or eliminated." The company hopes that such products will reduce incidence of disease compared to cigarette smoking, and bringing together 300 scientists from 30 different fields should help Philip Morris develop reputable, credible evidence of its success.
That said, Philip Morris will always have to deal with skeptics, and the regulatory processes in many countries won't necessarily follow the recommendations of research scientists affiliated with a tobacco company's initiatives. If regulators essentially ignore Philip Morris' scientific work and impose restrictions on reduced-risk products, it could hurt the company's long-term strategy toward more sustainable growth.
Philip Morris International has seen its stock soar, and many are optimistic about its future. However, if bad news in these three areas surfaces, then Philip Morris shares could give up some of their recent gains.
Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.