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This Will Make or Break Philip Morris International Tomorrow

By Dan Caplinger - Apr 19, 2017 at 9:26AM

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When the tobacco giant announces its latest results, one thing will stand out. Find out what to watch for.

Investors have been optimistic about Philip Morris International (PM -0.88%) so far this year, and the stock has climbed far further than the overall market. A big part of the reason why Philip Morris has recovered its positive momentum is that investors believe that a huge headwind that the tobacco giant has faced in recent years could finally be coming to an end. Yet the proof will be in the numbers, and Philip Morris will have its first chance to show its shareholders that negative impacts from currency-related factors will no longer hurt the company's results. If currency pressures persist, then it could put a big dent in the bullish case among investors.

Why currency has mattered so much for Philip Morris

It's hard to overstate the importance of foreign currency fluctuations on Philip Morris International's financial results. The company is based in the U.S. and reports its financials in U.S. dollars, but it does no business domestically. Instead, it gets all of its sales from countries across the globe, and the vast majority of them have their own currencies that aren't tied directly to the dollar.

Dollar bill.

Image source: Wikimedia Commons.

In the early years of its existence as an independent publicly traded stock, Philip Morris saw ups and downs in currency markets that generally evened out over time. But from 2014 to 2016, the dollar strengthened appreciably and remained high, and that took a huge chunk out of the tobacco giant's earnings. For example, in 2015, the strong dollar cost Philip Morris about $4.7 billion in lost revenue, and the impact on earnings added up to nearly $1.20 per share. Put another way, what would have been a double-digit percentage gain for Philip Morris during 2015 compared to 2014 instead turned into a double-digit decline -- and similar impacts on sales painted a very different picture of Philip Morris in currency-neutral terms versus what the company actually reported.

How shareholders have suffered

Philip Morris' currency woes have also shown up in the company's attitude toward dividends. Throughout most of its history, Philip Morris was generous with dividend increases, posting double-digit percentage gains during the first several years of its independent existence. Yet in the past two years, investors have seen dividend boosts of only 2%.

Moreover, even those increases have stretched Philip Morris' ability to sustain its dividends. The company's payout ratio has risen to more than 90%, and at times, the percentage has climbed into the high 90s. With Philip Morris having suspended stock buybacks as well, the amount of capital that shareholders have gotten back from the tobacco company has fallen dramatically.

Will Thursday bring good news for Philip Morris?

However, there's reason for investors to have hope that things will be better when Philip Morris reports its first-quarter earnings. First, the company has already said that it anticipates currency-related impacts to wane during 2017. In February, Philip Morris boosted its full-year earnings guidance by $0.10 per share, anticipating fewer headwinds from the strong dollar.

More importantly, the actual currency markets have shown a pause in the dollar's rise. Since the beginning of the year, the dollar index is actually down between 3% and 4%. It's important not to draw too strong a conclusion from this, because the dollar index is heavily weighted to the euro and the Japanese yen, while Philip Morris gets much of its revenue from countries that use different currencies. However, key currencies like the Russian ruble, Indonesian rupiah, and Australian dollar have held steady or gained against the U.S. currency over the past three months. That could finally earn Philip Morris a much-deserved respite from foreign exchange pressure and might even boost its results.

When Philip Morris International reports its first-quarter results on Thursday, watch closely to see if the company finally sees an end to currency-related hits. If it does, then the gains that the stock has already enjoyed could be just the beginning of a more extensive move higher.

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