Dividend Report Card: Philip Morris International

In this series, we analyze financial metrics to begin answering the following questions about a company's dividend:

1. Over time, has this company steadily increased its payouts?
2. How sustainable is the dividend?
3. Does the company have room to further increase the dividend?

The Dividend Report Card wasn't designed as a buy or sell signal, but rather as a tool to gauge the health of a company's dividend. For a full explanation of each category, click here for a tutorial.

Today's pupil is Philip Morris International (NYSE: PM), which posts a 4.2% yield.

Dividend history

Source: Capital IQ, as of Feb. 22.

Philip Morris International was spun off from Altria (NYSE: MO) in 2008, so we don't yet have a full five-year dividend track record. Still, in the company's short dividend-paying history, it has raised its quarterly payout by 39% -- from $0.46 per quarter in June 2008 to $0.64 today.

Nevertheless, past returns don't guarantee future results, so dividend history is only 10% of the final grade. Philip Morris International does, however, score a 5 out of 5 in this category.

Sustainability

Source: Capital IQ, a division of Standard & Poor's, as of Feb. 22.

Philip Morris International's balance sheet appears pretty strong -- indeed, Morningstar gives it a credit rating of "A-". The dividend has also consistently been well-covered by earnings and profits. In short, the current payout looks quite sustainable.

Growth

In 2008, Philip Morris International stated that it had "a dividend policy that anticipates a payout ratio of approximately 65%." It's been pretty near that figure since 2008.

One interesting thing about the company, however, is that since 2008, it has returned more cash in the form of share repurchases than it has in dividends. In fact, if you combine the buyback and dividend payouts, the augmented earnings payout ratio exceeds 100%. This is why the sustainable growth rate -- which only considers the dividend payout ratio in the equation -- is 52%, even though analysts expect 10.3% long-term earnings growth.

In one way, that's a positive for dividend investors. Stock buybacks are a lot less "sticky" than dividend commitments, so Philip Morris could conceivably reduce its buybacks and raise its target dividend payout ratio to 75%-80% without greatly impairing growth.

Competitors
An "ungraded" section of the dividend report card involves gauging how a stock's current yield stacks up against those of its direct competitors. If it's too high relative to competitors' yields, the board could be tempted to slow the growth rate, or vice versa, to bring it more in line with the industry average.

With its current yield at 4.2%, Philip Morris's dividend may be below the U.S. peer group, but it's more in line with its international-only competitors like British American Tobacco and Imperial Tobacco (4.2% yield).

Pencils down!
With all the numbers in, here's how Philip Morris's dividend scored:

A "B" is a very fine grade, especially for a stock yielding more than twice the S&P 500 average. Philip Morris International -- like most tobacco companies -- pays out the bulk of its free cash in the form of dividends, so the fact that it may score "4" and "3" on free cash flow payout shouldn't detract too much from your analysis.

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