Source: Philip Morris International.

Investors appreciate Philip Morris International's (NYSE:PM) commitment to returning capital to shareholders, with many owning shares because of the substantial 4.5% dividend yield the tobacco giant pays. Yet even with a history of raising dividends, Philip Morris has also put its free cash flow to use through stock buybacks. Having committed to a three-year, $18 billion buyback strategy in 2012, Philip Morris continues to do share repurchases as a regular part of its overall cash-management strategy. But two years in, investors want to know how the strategy has worked out for the company and whether it's the best use of Philip Morris' financial resources. Let's take a look at the success of the tobacco company's share repurchases from a number of different perspectives.

Were Philip Morris International's buybacks good for shareholders?
From a pure investment standpoint, Philip Morris hasn't had the success it would have hoped for from its share repurchases. Since the announcement of the $18 billion plan, Philip Morris stock has stayed in a relatively tight range, giving shareholders only a very modest gain over the period.

PM Chart

PM data by YCharts

Just looking at the past couple of years, it seems as though stock buybacks haven't been smart. But Philip Morris International has consistently bought back shares ever since it started trading as an independent company in 2008, and the climb in the company's share price since then shows the long-term value of the buyback strategy for Philip Morris. From a pure return standpoint, then, it makes sense that Philip Morris remains committed to its buyback strategy.

Are buybacks holding back Philip Morris International's growth?
Many investors worry when companies stop investing in their own growth and instead simply use available cash to repurchase shares. In industries with substantial growth prospects, focusing too much on returning shareholder capital can leave a company behind in terms of innovation and finding new profit opportunities.

In Philip Morris International's case, though, that's a harder argument to make. Growth opportunities in tobacco are fairly limited, and even though Philip Morris has pursued e-cigarettes and vapor products as a potential path to grow, the amount it needs to invest in those ventures at this point is small. Admittedly, the growing debt load that Philip Morris has taken on to finance its buybacks poses long-term concerns, but at current low interest rates, Philip Morris pays less in interest on some of its debt than it saves by not having to pay dividends on the shares it buys back.

Would higher dividends be better for Philip Morris investors?
Many people disagree about whether buybacks or dividends are better for investors. Dividend proponents pointing to the long-term outperformance of dividend-paying stocks while those who prefer buybacks note the tax advantages of not paying taxable dividend income to all shareholders.

Source: Philip Morris International.

With Philip Morris already sporting such a high yield, though, the arguments favoring boosting payouts further are much weaker. The current yield puts Philip Morris in the same ballpark as former parent Altria (NYSE:MO) as well as fellow U.S. peers Reynolds American (NYSE:RAI) and Lorillard (UNKNOWN:LO.DL). Moreover, over the past several years, Philip Morris has increased its dividend, and now, the amount it spends on dividend payments almost exactly matches its annual spending on buybacks. Given Philip Morris' fairly high earnings payout ratio on its dividend, further increases could prove problematic, and the current mix seems to create the right balance in the company's capital allocation strategy.

Will Philip Morris International's buyback plan work in the future?
Over the past six years, Philip Morris International's buyback plan has reduced overall share counts by more than 20%, with shares outstanding falling from more than 2 billion in 2008 to just $1.56 billion now. That contraction in share float has helped support earnings-per-share growth, and that in turn has given Philip Morris more room to raise dividends and deal with the challenges of a business in danger of long-term decline.

Source: Philip Morris International.

The threat to Philip Morris International's buyback strategy is that if rising interest rates ever cause financing costs to rise, then the debt that the company took on to finance its repurchases could create more drag on earnings growth and make its capital structure difficult to manage. For now, though, extensive rate hikes appear to be at least a year away, and that gives Philip Morris some room to evaluate its debt situation early. Moreover, Philip Morris has done its best to lock in low rates for the long term, with its long-term debt having an average weighted maturity of almost 11 years.

Philip Morris has spent huge amounts of money on buybacks, and in the long run, the strategy has paid off for shareholders. Whether that continues, though, depends on whether the company can execute well on its growth opportunities across the globe.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.