Monday, September 19, 2011

Phillip Morris International Delivers Another Smoking Hot Dividend Increase

Over the past week the Board of Directors of tobacco giant Phillip Morris International (PM) approved a 20.30% increase in its quarterly dividend to 77 cents/share. This was the fourth consecutive annual dividend increase for the company, since it was spun off from Altria Group (MO) in 2008.

In a previous article I outlined a few reasons why I am buying Phillip Morris International (PM) now. The company is well positioned to capitalize on its strong brand in emerging economies, while having the benefit of reduced liability risk in developed countries, since its operations are diversified on a global scale. Phillip Morris International expects to generate earnings growth that will provide shareholders with a rising stream of dividend income over time. In addition, the stock also spots a higher than average dividend yield, which makes it irresistible for income investors. Check my analysis of the stock.

The current dividend increase was the largest ever. The previous three dividend increases were for 17.40%, 7.40% and 10.40% in 2008, 2009 and 2010. Analysts are expecting this tobacco giant to earn $4.78/share in 2011, followed by $5.23/share in 2012. The company’s forward dividend payout ratio is at 64%, which is sustainable.


Phillip Morris International derives 37.60% profits from the EU, 27.50% from Eastern Europe, Middle East and Africa, 26.60% from Asia and 8.30% from Latin America and Canada. It is growing through continued product innovation, cost cutting, acquisitions and through organic growth in some emerging markets in Asia and Latin America. There are some risks to investing in tobacco companies, as increased regulation will make the operating environment more difficult.

Currently, Phillip Morris International is attractively valued per my entry criteria, trading at 14.40 times earnings and yielding 4.50%. While at first pass it may seem that the company has not increased dividends for more than 10 years, there are several factors that make me ignore this criterion. The fact that the predecessor company which PMI was spun off from had raised distributions for 4 decades and the fact that PMI has raised dividends every year since the spin off provide enough evidence that this company will likely maintain the dividend growth culture of legacy Phillip Morris.

Full Disclosure: Long MO and PM

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1 comment:

  1. Good call on PM! I had been waiting for it to drop down to a price within my margin of safety. It will definitely be on the short list to be added to the portfolio at the end of the month.

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