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Philip Morris International Dividend Safety Analysis
Posted by: 4Percent (IP Logged)
Date: October 25, 2013 11:10AM
Philip Morris International Inc. (PM) is the leading international tobacco company, with seven of the world’s top 15 international brands, including Marlboro, the world’s best-selling cigarette brand. The company was created as a spin-off of Altria Group’s (MO) international tobacco business in 2008. Tobacco companies like PMI have been a safe-haven for income seeking investors for many years now due to the industry’s higher than average dividend yields. Utilizing our Dividend Safety scoring system, let’s take a look at the security of Philip Morris International’s current dividend payment.
* Dividend history includes data before the spin-off from Altria Group.
PMI has achieved an impressive dividend history when including its time before the spin-off from Altria Group. Since its spin-off in 2008 it has added to that history by averaging double digit annual dividend growth. Also, despite heavy and steadily increasing taxes on its product over the years, PMI has still managed to retain its healthy profit margin. PMI does not keep much cash-on-hand ($3.4 billion) when comparing it to its annual dividend payout of over $6 billion. This lower amount of cash-on-hand is likely the cause of the Quick Ratio being below our target of 1. Finally, the debt to total capital figure stands out as it appears incredibly high. When looking closer at this, one can see it is due to PMI having a negative stockholders equity figure. The negative equity is due to the fact that PMI has been using a favorable credit market to fund share buybacks. Essentially they are borrowing at today’s low interest rates in order to take out a higher equity cost. This is a common practice among tobacco companies and will likely pay off over time so it should not be seen as a negative.
PMI’s current yield of 4.3% may be lower than its industry peers when comparing Altria Group’s 5.4% yield, Reynolds American’s (RAI) 5% yield, and Lorillard’s (LO) 4.6% yield. But by operating outside of the heavily regulated United States PMI has much higher growth potential as the company is able to utilize its strong branding and financial prowess to enter emerging markets where tobacco use is increasing.
We believe PMI’s current dividend is very safe and investors will likely continue to see high single to low double-digit annual increases in the coming years.
Disclosure: The 4% Portfolio Retirement Service recommends PM.
Stocks Discussed: PMI, MO, LO, RAI,