Philip Morris Disappoints Investors With Its Dividend Hike

Tobacco giants – Altria (NYSE:MO) and Philip Morris International (NYSE:PM) – have been among the top dividend giants in the stock market, and share much of their history together. Until 2008, the two companies were one corporate entity; but, the spin-off of Philip Morris International from Altria eight years ago resulted in the separation of the international tobacco business, from the domestic tobacco and wine segments, which remained with Altria. Altria has a history of boosting its dividend for 46 years consecutively, after accounting for the impact of spin-offs.  Since the separation, PM has also been giving its shareholders a higher payout every year, and as expected, the company announced a dividend hike last week. Since 2008, the company’s dividend has risen by 126%, which works out to an average annual hike of almost 11%, which is massive, when compared to other companies. However, the pace of the company’s dividend growth has slowed considerably in recent years. Even this year, the size of increase was underwhelming, reflecting the continued pressure the company faces.

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Starting with the dividend to be paid in October, PM’s shareholders will receive $1.04 per share every quarter, for four quarters. This is a 2% increase over the previous payout of $1.02 per share, matching the 2% rise given in 2015. However, when compared with the earlier hikes given by the company, this raise seems paltry in comparison.

Given this perspective, it’s not hard to understand the shareholders’ disappointment with the downward trajectory of their dividend increases. With the greater currency pressure faced by the company, as a result of the dollar strengthening against other currencies in which PM conducts its business, what would have been substantial growth in sales, when currency effects are excluded, has turned into sluggish or stagnant results for the company in dollar terms. PM is also expecting a hit of 40 cents per share to its EPS this year as a result of a strong dollar. Furthermore, with the dividend payout ratio approaching 100%, PM anyway does not have much room for dividend growth. In the first half of the year, the company’s free cash flow was also down by over 18%, and since the company has a history of spending most of its FCF on dividends, the token increase in dividend should not have come as much of a surprise.

Historically, PM has spent considerably on its share repurchase program over the course of its history. However, since 2014, this has also dried up, with the company choosing to suspend this program. This has also put a stop on the huge return of shareholder capital, which in some years has exceed even the company’s dividend payments. Back in 2015, former CEO Louis Camilleri had blamed the negative foreign currency effects for this. The company in its last earnings call had cited a more favorable currency market environment; however, more recent macroeconomic trends, including the Federal Reserve’s likely chance to raise interest rates, will increase the strength of the dollar. It is probable, this was also behind the company’s decision to limit the dividend hike.

Have more questions on Philip Morris? See the links below:

• What Are The Risks Associated With Holding Philip Morris’ Stock?
• Can iQOS Be A Key Growth Driver For Philip Morris In The Future?
• What Led To The Poor Performance Of Philip Morris In Its Latin America And Canada Region In The Second Quarter?
• Philip Morris Q2 2016 Earnings: Currency Headwinds Leave The Company Flat
• How Will Philip Morris Perform In Q2 2016?
• Which Is A Better Dividend Bet – Altria Or Philip Morris?
• What Is The State Of The Illicit Cigarette Market In The European Union?
• How Will The Brexit Impact Philip Morris?
• What Effect Will The Plain Packaging Ruling In Canada Have On Philip Morris?
• What Effect Will A Tobacco Tax Hike Have In New Zealand?
• How Will Philip Morris Perform In 2016?
• Why Has Philip Morris’ Price Risen ~17% This Year Despite An Earnings Miss?
• How Did The Market Share For Philip Morris Change in Q1 2016 In EU And Its Key Markets, As Compared To Q1 2015?
• How Did The Revenue And Operating Companies Income In Each Region Change In Q1 2016, As Compared To Q1 2015?
• Philip Morris Misses Q1 Revenue And EPS Estimates
• Will Philip Morris Beat Expectations This Earnings Season?
• How Did Philip Morris Perform In The European Union, And Its Key Markets There, In 2015?
• How Did Philip Morris Perform In Russia, Given The Currency Headwinds And Excise Tax Rise?
• How Has Philip Morris Fared In Comparison To Its Peers?
• How Has Philip Morris’ Shipment Volume, By Brand, Changed Over The Past 3 Years?
• How Has Philip Morris’ Revenue And EBITDA Composition Changed In The Last 5 Years?
• How Will Philip Morris’ Revenue And EBITDA Change In The Next 3 Years?
• Philip Morris: Year 2015 In Review
• By What Percentage Did Philip Morris’ Revenue & EBITDA Change In The Last 5 Years?
• What is Philip Morris’ Fundamental Value Based On Expected 2016 Results?
• What is Philip Morris’ Revenue And EBITDA Breakdown?

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