Image: Philip Morris International.

Investors have come to look at tobacco stocks as cash cows, and many companies in the business have built up a strong reputation of returning capital to shareholders in multiple ways. Ever since it came public as an independent company, International tobacco giant Philip Morris International (NYSE:PM) has used its capital to pay back shareholders with a combination of dividends and stock buybacks. Recently, though, Philip Morris has pulled back on its generosity, and its capital allocation strategy has changed substantially over the past couple of years. Let's take a closer look at what Philip Morris has done and what the future could bring.

Big buybacks at Philip Morris International
For most of its history as a public company, Philip Morris International has made buybacks an integral part of its capital allocation strategy. The tobacco giant returned more than $5.25 billion to shareholders during its first full year of independence in 2008, which made up more than half of its total capital return to investors. Add to that another $4.2 billion in regular dividends paid on common shares and a special dividend adding up to another $900 million, and Philip Morris managed to send back more than $10 billion in capital to shareholders in a single year.

In subsequent years, Philip Morris maintained and grew that level of return for its investors. Buybacks stayed above $5 billion consistently, topping out at more than $6.5 billion in 2012. Dividend payments steadily grew, and even gradually, the total amount of capital return very nearly reached the $12 billion mark. All the while, Philip Morris managed to keep buybacks as the larger tool in its capital allocation arsenal.

Turning the tide in 2014
In 2014, however, Philip Morris pulled back on its buyback activity. This came as somewhat of a shock, given that the company had authorized a three-year, $18 million buyback program in August 2012. Between then and the end of 2014, Philip Morris had used only $12.7 billion of that money, but the tobacco giant nevertheless made no repurchases of its stock during 2015.

In explaining the decision to pull back on buybacks, Philip Morris executives explained that the huge drop in the value of foreign currencies worldwide against the U.S. dollar prompted the move. Even though the tobacco business continued to grow from a fundamental standpoint, the strength of the U.S. dollar effectively hid that growth and hurt the company's earnings per share when measured in dollar terms. Competitor British American Tobacco (NYSE:BTI) and other foreign rivals didn't suffer the same fate, because the income that British American Tobacco earns is measured in British pounds, which have weakened against the dollar. Philip Morris ended up choosing between sustaining its dividends or keeping its repurchase activity up, and it chose to preserve the former and suspend buybacks.

What's next for Philip Morris' buybacks?
Philip Morris has already said that it plans no repurchases in 2016 either, although it seemed to keep the door open to a potential reinstatement of stock buyback activity if the dollar starts to give up ground. Fortunately for the tobacco company, the dollar's gains have indeed come to a halt in many parts of the world, and in some countries, local currencies have rebounded sharply. For instance, commodity-rich areas like Canada and Australia have seen their currencies bounce back from their worst levels. They have a long way to go before they can return to their former levels, but if the rest of the world follows their lead, then Philip Morris buybacks could be back in the near future.

Investors should keep an eye on the relative strength of currencies in deciding whether Philip Morris is likely to start making stock repurchases again. The more important result of a weaker dollar is that Philip Morris could look more attractive from a growth perspective than British American Tobacco and other competitors around the world.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium advisory service. We’re motley! Questioning an investing thesis -- even one of our own -- helps us all think critically about investing and make decisions that help us become smarter, happier, and richer.