Dividend investors want their stocks to make regular increases in their quarterly payout, and their favorite stocks typically make predictable boosts at around the same time every year. During its decade-long history as an independent stock, Philip Morris International (NYSE:PM) has consistently announced higher dividend payouts each September. Unfortunately, the size of those increases has shrunk in recent years, and longtime shareholders were bracing for another paltry rise for 2017. Philip Morris ended up giving investors a little more than many expected, but the company still seems to see challenges going forward.

What Philip Morris just said about its dividend

Philip Morris recently announced that its board of directors had increased the company's regular quarterly dividend by 2.9%. Beginning in October, shareholders in the tobacco giant will get $1.07 per share in cash every quarter. That marks a $0.03 per share rise from its previous payout of $1.04 per share.

The first reaction that some investors had at the news was surprise that the increase was slightly larger than most had feared. As you can see below, Philip Morris had started out giving its shareholders extremely strong dividend growth, with boosts in quarterly payments that typically amounted to double-digit percentage gains. Yet in each of the past two years, the dividend increase was just 2%.

Year of Dividend Increase

Percentage Increase in Dividend

2008

17%

2009

7%

2010

10%

2011

20%

2012

10%

2013

11%

2014

6%

2015

2%

2016

2%

 Data source: Philip Morris investor relations.

In that context, a 3% rise is a slight upgrade from what investors have seen recently. Yet it isn't enough to reverse longer-term concerns about the ability of Philip Morris to get back to annual dividend growth of 10% or more.

As has been the case in the past, Philip Morris' board of directors didn't give any details about how they decided the amount by which to increase the dividend. They simply noted that the move was the 10th straight annual increase, and that the stock's compound annual growth rate of its dividend increases adds up to 9.8% since Philip Morris became a publicly traded company in 2008.

Not wanting to overextend itself?

Those who've followed Philip Morris understand how the tobacco giant got into a more difficult environment. Weak foreign currencies in recent years depressed earnings growth, and that prompted the initial decision to slow the pace of dividend increases. Even though currency impacts have started to wane, other factors have held earnings back.

Philip Morris in the past has argued that it needs to keep its payout ratio at sustainable levels, and that requires controlling dividend growth during times of stagnant earnings performance. Investors are hopeful that earnings will be able to catch up with and surpass growth rates in dividends. Based on the company's most recent guidance for earnings of $4.78 to $4.93 per share, the new payout would correspond to between 87% and 90% of Philip Morris' bottom line. That's getting closer to the historical target of 80% or so that the company would probably prefer to see.

Person holding an iQOS heated tobacco device.

Image source: Philip Morris International.

What's next for Philip Morris International's dividend?

The true intent of Philip Morris' dividend increase is to signal the idea that the company wants to restore dividend growth rates to their past levels. Right now, the company's fundamentals aren't strong enough to warrant double-digit percentage increases in the dividend. Yet with a new higher yield of 3.7% and the promise of major advances in the alternative products category contributing to prospects for substantial future growth, Philip Morris is trying to let its shareholders know that it sees better times ahead not just for the company as a whole but also for income investors seeking better dividend performance from the tobacco giant in the years to come.

Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.