(Due to an earlier error we have corrected this story. The correction includes updated charts on dividend yield and free cash flow, removes chart on payout ratio and corrects figures on dividend yield history and dividend obligations.)
Recently, I wrote an article discussing the viability of Altria's (MO) dividend. As it turns out, there is another tobacco stock in the S&P 500 that is yielding higher than Altria. Philip Morris International (PM) has been a high-yielding stock for some time. The stock currently has a yield over 4.5%, while trading less than 10% down from its 52-week high.
Currently, the payout ratio on a trailing twelve-month basis is at 87%, which gives Philip Morris room to cover dividends with earnings.
Looking beyond this quarter, analysts expect Philip Morris's earnings to drop below dividend coverage in the fourth quarter, but they are expected to grow over the next few years. The payout ratio will breach the 90% mark on a trailing twelve-month basis, but will fall to under 80% (if the dividend is maintained) by late 2017.
Another indicator of dividend sustainability is comparing free cash flow on a trailing twelve-month basis to dividend obligations. This indicator represents one area of concern for investors. While the dividend obligations sit at $6 billion on a twelve-month basis, free cash flow fell from $9 billion to $6 billion on a trailing twelve-month basis. This gap tightening has led to Philip Morris essentially having enough free cash flow to cover dividends, but not enough to raise the dividend. Investors should keep a close eye on free cash flow in future earnings reports.
A differentiator between Philip Morris and Altria is that PM is more prone to volatility. Altria's beta is currently hovering around 0.6 while Phillip Morris's is at 1. For income investors, a long-term view may negate the consideration of volatility. However, active investors should note that if volatility continues, Philip Morris may have more downside risk than Altria.
Overall, I believe that Philip Morris will maintain its current dividend ($1.02 quarterly) through the end of 2016.
Source for charts: Jeremy LaKosh