Tobacco stocks traditionally do a good job of paying lucrative dividends to shareholders, and even though it only has a few years under its belt as a public company, Philip Morris International (NYSE:PM) has started off well. Following in the footsteps of former parent Altria Group (NYSE:MO), Philip Morris has consistently paid increasing amounts as dividends during its short history. Yet Philip Morris has gone through some recent struggles, and the implications for dividend investors are at least somewhat troubling. Let's look more closely at two things every dividend investor should know about Philip Morris International.
1. Dividend investors in Philip Morris International need to keep an eye on the U.S. dollar.
One of the biggest variables Philip Morris has to deal with is translating its financial results into U.S. dollar. The irony of that necessity is that the U.S. is just about the only major region where Philip Morris doesn't do business, having ceded its exposure to the domestic market to Altria and its rivals. Nevertheless, as a company based in the U.S., all of its foreign-currency revenue needs to be translated back into dollars.
As a result, a strong dollar hurts Philip Morris International's earnings because the money it brings in from abroad isn't worth as much in dollar terms. That has been a major contributor to Philip Morris International's having to cut its full-year earnings outlook for 2014 when it reported its third-quarter earnings last week. Now, Philip Morris expects earnings per share to come in at just $4.76-$4.81, down from its previously announced range of $4.87-$4.97 per share.
It's hard to overstate the effect that the strong dollar has had on earnings. Philip Morris International's current forecast includes $0.72 per share in unfavorable currency impacts for the full year. That equates to more than $1.1 billion in lost income solely due to currency impacts, representing a huge chunk of the $2.15 billion in profit Philip Morris earned during the third quarter.
The good news for dividend investors is that if the pain from foreign exchange issues finally stops, then Philip Morris is in a great position to see earnings bounce substantially. If the company meets its target of 6.5%-7.5% growth in diluted EPS after adjusting for currency impacts and other one-time items, then adjusted earnings of $5.75-$5.80 per share would be within reach. That would go a long way toward supporting not only Philip Morris International's current dividend but also any future increases along the way.
2. Watch the success of the iQOS cigarette-alternative product to see if it could give Philip Morris substantial growth prospects.
Domestically, investors have gotten used to cigarette volumes steadily declining over time. Unfortunately, Philip Morris International has seen some of the same trends in a few of its key markets, even though plenty of other emerging markets have provided solid bases for growth. Given how much Philip Morris relies on developed areas of the global economy, such as Europe and Japan, the tobacco giant can't afford to rely on little-regulated sales in high-growth areas of the world being able to offset adverse trends elsewhere.
One answer Philip Morris hopes will provide strength in its financials is its reduced-risk portfolio of products. The coming release of its iQOS tobacco-heating system and Marlboro HeatSticks could fuel a new wave of popularity among Philip Morris customers. The idea behind heating tobacco is that doing so could produce fewer harmful chemicals than outright burning does, and that could sit better with regulators who've raised concerns about whether electronic cigarettes are in fact a better alternative than traditional tobacco products.
With plans to introduce iQOS in Japan and Italy soon, investors will have their first look at the profit-making capacity for the new products. If they pan out well, then Philip Morris could have a brand new growth opportunity to help push its dividends even higher over the long run.
Philip Morris has shown no signs of any threat to its dividend in the near future, and in fact, if the strength in the U.S. dollar reverses or even moderates, then the company has plenty of opportunities to raise its dividend payout. Nevertheless, given the length of the dollar's rally, investors should likely sit tight to see how long it'll take for earnings to start growing again.