The best dividend stocks routinely make sizable increases to their quarterly payouts, with their healthy fundamental business prospects making it possible for the company to return more of its capital to its shareholders in the form of dividends. When a successful dividend stock starts to slow the pace of its annual dividend increases, though, it can be a warning sign of future trouble.

Philip Morris International (NYSE:PM) has a good history of producing dividend growth, with annual increases to its payouts every year since it went public more than a decade ago. However, Philip Morris dramatically slowed its dividend growth pace for several years, and longtime shareholders anxiously waited to see if the 2018 increase was as modest as they'd seen recently. In that light, the tobacco giant's nearly 7% boost was a breath of fresh air and signaled the company's intention to return to its former status as a dividend growth powerhouse.

Cash, glasses, calculator, and notebook marked Dividends on a flat surface.

Image source: Getty Images.

What Philip Morris just did for investors

Philip Morris said in June that its board of directors had agreed to boost the company's regular quarterly dividend by 6.5%. Beginning with its July payment, Philip Morris shareholders will henceforth get $1.14 per share in cash every quarter. That's $0.07 per share higher than the $1.07 per share that the tobacco giant was paying prior to the move.

The move came as a nice surprise for investors who'd gotten used to the minimal dividend increases of the previous three years. Although Philip Morris' early years as an independent company often included double-digit percentage dividend growth, the pace of payout increases slowed in 2014 and gave investors only 2% boosts for two years in a row from 2015 to 2016.

Year of Dividend Increase

Percentage Increase in Dividend





















 Data source: Philip Morris investor relations.

Last year's 3% move was a step in the right direction, but only with the recent move has Philip Morris demonstrated any real commitment toward restoring its past history of delivering 10% or greater dividend growth.

Philip Morris doesn't tend to give much color in its decisions about its dividend, and this year's announcement was no exception. Board chair Louis Camilleri simply said that the "decision reflects the Board's confidence in the growth outlook of the company's business, underpinned by the potential of its smoke-free products, and underscores the Board's steadfast commitment to generously reward shareholders over time." The move marked the 11th straight year of annual dividend growth.

Mixed signs ahead

It's true that some of the headwinds that hurt Philip Morris in recent years have started to dissipate. The most important is the negative impact of foreign exchange, because the U.S. dollar has finally halted its dramatic gains against major foreign currencies and started to give up some ground in some key regions for the tobacco giant's business. Philip Morris has actually gotten some benefits on the currency front lately, and that could help earnings if the trends continue, making it easier for the company to increase dividend payments.

Yet Philip Morris is still paying out a fairly high fraction of its overall earnings to shareholders as dividends. With the boost, an annual rate of $4.56 per share represents about 90% of the company's expected earnings range of $5.02 to $5.12 per share for 2018. That's above the roughly 80% payout ratio that the tobacco business has targeted, but it's not unsustainably high at current levels.

Moreover, some investors are nervous about Philip Morris' immediate growth prospects. After seeing exponential growth in the rollout of its iQOS heated tobacco devices in Japan and other key markets, Philip Morris has had to deal with decelerating volume gains in the Japanese market. The company seems confident that its reduced-risk portfolio of products still has lots of promise, and it will have to make good on those views if it wants to keep delivering higher dividends.

What to expect in 2019

Philip Morris hopes to post ongoing earnings growth, and a dividend increase of 7% to 9% each year in the future would be consistent with the targets that the tobacco giant has set for itself. Further challenges await, but so do new opportunities, and if Philip Morris can execute well, dividend investors can expect to share in the company's success in 2019 as well as in future years.