Philip Morris Looks Likely to Puff Up Its Dividend Soon

If history over the last decade is any guide, it means that soon after the Labor Day weekend we will be hearings about a fresh dividend hike from tobacco company Philip Morris International . Even before any new increase, the shares already sport a quarterly dividend of $1.17 per share, which equates to an annualized dividend yield nearly 6.0% due in part to the year-to-date decline in the company's share price. Over the last few years, Philip Morris has grown its divided by modest increments following more pronounced increases over the 2008-2013 period. But in light of management's comments during the company's June quarter earnings conference call that its commitment to the dividend remains unwavering, odds are there will be some increase likely to be announced in the next few weeks. Before we dig into PM shares any further, let's remember that while it was once a part of the company now known as Altria it does not participate in the U.S. market for cigarettes, smoke-free products and other nicotine-containing products. That's the domain of Altria, while Philip Morris' key markets are Europe and Asia with a modest presence in Latin America. According to data published by the World Health Organization, the company's business is focused on the right markets given that Europe has the highest prevalence of tobacco-smoking among adults (28%), followed by the Western Pacific (26%). Those percentages compare to 17% in the Americas. Even as the industry focuses on alternatives to tobacco-related products, cigarettes accounted for 92% of Philip Morris' revenue in 2019, led primarily by its Marlboro and L&M brands. While the company touts 10 brands in its annual 10-K filings, those two accounted for half the company's cigarette volume in 2019. The company sees its volumes improving in the second half as the impact of Covid-19 lockdown restrictions in its geographies wane, but even so it sees its shipment volume down 8% to 10% in 2020. In light of Philp Morris' price leadership over the last 18 months or so, it expects its net revenue to fall by the low single digits on a percentage basis, which combined with operating margin improvement should lead to consensus earnings declining just 2% to 3% in 2020 to roughly $5.07 per share from 2019's $5.19 a share. Digging into the quarterly spread of those 2020 earnings, we see a return to year-over-year earnings growth that should pave the way for further improvement in 2021. That bodes well for dividend increases ahead. Despite the known health issues related to tobacco consumption -- a factor for some investors, especially those who utilize environmental, social and governance (ESG) filters -- this vice is one that has rather inelastic qualities. That fact has allowed tobacco companies to pass through price increases to offset, if not more than offset, volume declines, oftentimes benefitting their margins and earnings. With Philip Morris management committed to the company's dividend, odds are that we will see another upward bump in the company's quarterly payout. Even if it's only a modest increase of 2% to 3%, similar to the one it announced in September 2019, it would boost the dividend to $1.19 to $1.20 and offer an annualized yield in the range of 6.15 to 6.2% at the current PM share price. With the Fed poised to keep interest rates low for some time, PM shares offer a favorable dividend yield. And for those who may be concerned about the vice nature of the company's business, perhaps these words from Abraham Lincoln may speak to you: It has been my experience that folks who have no vices have very few virtues.

Philip Morris Looks Likely to Puff Up Its Dividend Soon

The tobacco giant's management has said its commitment to the dividend "remains unwavering," which supports expectations of a coming hike.

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