Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes, other nicotine-containing products, and smoke-free products and related electronic devices and accessories.
The company raised its quarterly dividend by 2.60% to $1.17. Philip Morris International has managed to boost distributions annually since being spun off from Altria in 2008.
The company has managed to boost dividends at an annualized 16%/year over the past decade. However, dividend growth has definitely slowed down substantially, to just 4.80%/year annualized over the past five years.
Dividend growth has slowed down due to the lack of earnings growth since hitting $5.26/share in 2013. The company has been able to boost dividends by increasing its dividend payout ratio, which has a natural limit to dividend growth.
Between 2008 and 2018, earnings per share rose from $3.24 to $5.08. The company is expected to generate $5.22/share in 2019.
The stock is attractively valued at 14 times forward earnings and offers a dividend yield of 6.40%. The payout ratio is at 89.70%, which is high for a tobacco company, but potentially dangerous given the flat earnings. There is an increased risk that the dividend may be sacrificed if PMI and Altria are allowed to merge.
For a value investor, it may make sense to buy the stock today, and hope that the P/E multiple expands so that you can sell the stock. You will be paid a nice 6.40% in the process, for as long as the dividend is at least maintained. As a long-term dividend growth investor, I see increased risks of a dividend cut, and I do not want to be limited to just earning the dividend from a security. I buy shares in growing businesses to hold on to, and not to buy low and sell high. The flat earnings per share create pressure on management to do something, such as pursue acquisitions and do different things to jump-start earnings growth. This activity may come at the expense of the dividend. If they successfully manage to kick-start earnings growth, then the payout ratio could gradually decline to a more manageable level, while still growing the dividend. Either way, I will continue holding on to PMI and Altria for the time being, but will refrain from adding more to my positions.