Is the Philip Morris Dividend Safe & Will It Grow?
It has been a while since I completed a Philip Morris dividend stock analysis.
So today, let’s dig into a Philip Morris dividend review to see what it tells us about Philip Morris stock (NYSE: PM) and its prospects.
I’m actually thinking about adding to my Philip Morris shares in the near future. This PM stock analysis will help me make a decision.
Before we get started, a brief editorial comment. Since you found your way here, it’s quite possible you think about dividend investing in “sin stocks” like me. Or, maybe not?
Socially Conscious Investing & The Philip Morris Stock Dividend
I don’t smoke. And I do not like being around people who do. That’s just my personal preference.
On the other hand, smoking is not against the law. So if people want to smoke, that is fine with me as long as I’m not around them when they are doing so.
As a result, I won’t let my social convictions influence my investing decisions. In short, I’m not a socially conscious investor.
I follow the cash in the form of dividends regardless of what type of business a company operates. And from my perspective, the Philip Morris stock dividend must stand on its own merits.
If you feel differently, that’s okay. I respect your opinion.
With that editorial comment out of the way, let’s get on with today’s Philip Morris dividend stock analysis. Before we conclude, I’ll give you a bit of my history with this investment.
Looking for something a little different? Then check out my library of nearly 100 dividend stock articles. I’m sure you can find something of interest. Maybe a few good dividend stocks or investing ideas to improve your finances.
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Philip Morris Company Background
We will get started with a brief company background.
PM Stock Spin-Off
Philip Morris came into existence during March 2008. The company was formed by a stock spin-off from Altria.
Thus, Philip Morris has a relatively short time operating as a stand-alone company. However, its operations and brands have a long history under its former parent, Altria.
Philip Morris stock trades on the New York Stock Exchange. It operates under the ticker symbol PM (NYSE: PM).
Philip Morris Operations
Philip Morris is a leading international tobacco company. They employ a global workforce of more than 70,000 people.
Source: PMI.com – Who We Are
Furthermore, the company has significant brand recognition among smokers.
Some of their well known cigarette brands include:
- Philip Morris
- Bond Street
Smoke Free Alternatives
The company also develops and sells smoke-free alternatives to cigarettes. They call them reduced-risk products or “RRPs” for short. In this segment, they have a popular heated tobacco system called IQOS.
Effective international investments in marketing have led to brand recognition being a competitive advantage for Philip Morris. Therefore, new laws requiring plain packaging for their packs and cartons of cigarettes is troubling.
Plain packaging laws could erode the company’s brand power. This is a business risk and an area that deserves watching in the future.
It is well documented that cigarette use is in global decline. Because of this, Philip Morris is attempting to transform itself for the future.
They make many statements on their website about the transformation that is underway. I have summarized a few for you.
Dedicated to replacing cigarettes with smoke-free products as fast as possible.
Many scientists, engineers, and technicians are at work in our research facilities developing less harmful alternatives to cigarettes.
It’s the biggest shift in company history.
With their vision and transformation in mind, the company’s goal is to significantly increase annual revenue from RRPs. RRPs have grown to 24% of total revenues. For comparison, in 2018, RRPs accounted for only 14%.
Source: PMI Investor Information Kit
Enough about Philip Morris, the company, its history, products, and powerful brand recognition.
Let’s dive into all the facts and figures about the Philip Morris stock dividend.
Does Philip Morris Stock Pay Dividends?
Yes. Philip Morris stock pays dividends. Management has declared and paid regular dividends since the company’s inception in 2008.
How Much Is PM’s Dividend Per Share?
Philip Morris pays an annual forward dividend of $4.80 per share.
Philip Morris Dividend Yield
Based on the recent stock price, the company’s dividend payout puts the Philip Morris dividend yield at a very attractive 6.5%.
Does Philip Morris Have A Dividend Schedule?
This is what I found on the company’s investor relations website:
“Dividends are declared and approved at the discretion of the Board of Directors. The anticipated dividend dates have been adjusted to fit the calendar of Board meetings.”
This is a typical practice for companies that pay dividends. Each dividend must be declared and approved by the board of directors before it can be paid.
The statement is vague. So let’s look at past dividend payment schedules to better understand when and how often Philip Morris stock dividends are paid.
How Often Does Philip Morris Pay Dividends?
PM pays dividends every 3 months or 4 times per year. The quarterly dividend payments are $1.20 per share.
In Which Months Does Philip Morris Pay Dividends?
Philip Morris consistently pays dividends in January, April, July, and October. The dividend payment is typically made on our around the 10th day of the months I just mentioned.
Philip Morris Ex-Dividend Date
As an investor in Philip Morris stock, you must complete your investment by the ex-dividend date. That is if you want to receive the next stock dividend payout.
For Philip Morris, the ex-dividend date falls on or around the 20th day of the month PRIOR to when its quarterly dividend is paid.
These dates are subject to change. And they are partially dictated by the timing of the Board’s approval of each quarterly dividend payment.
So, if you want the next payment to increase your dividend income. Be sure to check the company’s investor relations website for the exact dates.
On the other hand, if you are a buy and hold investor like me, there is no worry. Once you make your investment, you will be eligible for every dividend payment in the future.
There is nothing more for you to do. Just sit back and collect your passive income from dividends!
Philip Morris Dividend History
Philip Morris is starting to build an impressive dividend history. Here are a couple of important facts regarding that history:
- Immediately started paying dividends after the split from Altria in 2008
- 2020 is the 13th consecutive year the dividend has been increased
13 consecutive years of dividend increases make Philip Morris a Dividend Achiever. Dividend Achievers are up and coming dividend-payers. They have stocks that have increased dividends 10 years or more.
So, we know Philip Morris has a history of growing its dividend. But what does the dividend growth rate look like? Let’s look at that key dividend metric next.
Philip Morris Dividend Growth Rate
To see what’s going on with dividend growth, let’s look at the last 7 years. And compare it to years prior.
Table 1: Compound Annual Dividend Growth
|1 Year||3 Years||5 Years||7 Years|
In its early years after the spin-off from Altria, dividend growth was quite high. It was not unusual for the company to increase its dividend by 10% or much more each year.
Since 2008, dividend increases amount to more than 150%. That is an annual rate of increase exceeding 8%.
On the other hand, as table 1 shows, dividend growth has been much lower recently. Confirming this trend, the company increased its dividend by just 2.6% in September of 2020.
Philip Morris Dividend Policy
I searched around for any clues about PM’s dividend policy. This is what I found in their investor information kit. Company management says…
“Dividends are the primary use of our operating cash flow after capital expenditures”.
Next, let’s move on to business fundamentals. And the dividend payout ratios. These elements will help me make a determination of both Philip Morris’s dividend safety and projected dividend growth.
Philip Morris Revenue And Its Influence On The Dividend
In reviewing revenues, I have removed the impact of taxes imposed by regulators. These taxes are just passed through from PM’s customer sales to the taxing authorities in each country in which it operates.
Chart 1: 7 Year Revenue Trend
Lower cigarette consumption and the negative impact of exchange rates have taken on a toll on revenue. It has been mostly range-bound for the last few years.
Because Philip Morris transacts much of its business in foreign currencies, a stronger US dollar puts pressure on revenue, profits, and cash flow. Our dividends are paid in US dollars. So, the stronger U.S. dollar of recent years has constrained profits and therefore, dividend growth.
On the other hand, price increases have supported revenue and profits. The ability to push through price increases are a result of strong loyalty to the company’s brands.
Have you seen the cost of a package of cigarettes lately? It’s unbelievable to me how much tobacco companies are able to charge. Of course, those prices include the large taxes I just mentioned.
Eliminating the impact of foreign currency conversion, company management expects to grow revenues by at least 5% annually through 2021.
The growth is expected to come from these areas:
- Higher prices for cigarettes
- Higher volumes for reduced-risk products
- Product innovation
Next, let’s see how revenues translate to earnings. And what the dividend payout ratios look like. A company with high dividend payout ratios will usually have lower dividend growth. Let’s see if that will be the case for PM.
Philip Morris Dividend Payout Ratio Based on Earnings
Despite declining volumes in its core business, the company generates substantial and stable earnings. Profit growth comes mainly from product price increases and operating expense reductions. Plus the volume growth from RRPs.
Chart 2: Philip Morris Dividends & Earnings Per Share
For 2019, the dividend payout as a percentage of earnings spiked to 100%. This was due to a number of one-time charges to earnings to settle litigation and tax matters.
Earnings are expected to recover in 2020. Management projects 8% growth in adjusted diluted earnings per share through 2021.
With earnings bouncing back, I expect the Philip Morris dividend payout ratio to return to a near 90% level in 2020. Close to where it has run in recent years.
The dividend payout ratio is quite high. But because of the predictability of cash flows, I do not find it concerning.
On the other hand, a high payout ratio will keep future dividend growth on the low side until we see sustainable earnings growth that translates into free cash flow.
So, let’s see how the Philip Morris dividend stacks up against cash flow next.
Philip Morris Dividend Payout Ratio Based on Cash Flow
For 2019, the dividend consumed 78% of free cash flow. I expect the dividend payout ratio to trend higher for 2020. Likely higher than 85%.
Chart 3: Philip Morris Dividends & Cash Flow
The company suspended the use of cash for share repurchases in 2015. Since then, any excess free cash flow after paying the dividend is usually allocated to debt reduction.
Next, I want to determine how PM’s future dividend growth will impact my dividend income.
Philip Morris Projected Dividend Growth
Future dividend growth will be constrained by a number of factors we have discussed thus far. Here is a brief summary of the headwinds to dividend growth:
- High dividend payout ratios
- Negative impacts from currency translation
- Uncertainty about the company’s transition to RRPs
With those items in mind, I project PM’s dividend growth will be 2-4% on an annual basis. Not until I see a sustainable increase in earnings and cash flow will I consider raising my forecast.
Keep this growth forecast in mind. It provides some clues as to what I think about Philip Morris dividend safety. But before I offer up that opinion, let’s look at the company’s financial position in the form of its credit rating.
Philip Morris Credit Ratings
Philip Morris has an A2 and A credit rating from Moody’s and S&P, respectively. These ratings represent “investment grade – low credit risk”.
Table 2: Credit Rating Evaluation Grid
Most solid dividend-paying companies hold investment-grade credit ratings. And I was glad to see in the company’s investor materials that management clearly states they “remain fully committed to maintaining our single A credit rating”.
Philip Morris Dividend Safety
Now, let’s talk about dividend safety. When I speak of dividend safety, this is what I mean. Is the Philip Morris dividend safe from a reduction for the foreseeable future?
First of all, the company’s dividend payout ratios are a little higher than I prefer.
Furthermore, PM is a high yield dividend stock.
Finally, the company is in the midst of a transformation away from a declining product line. The results of which are uncertain.
These are early signs for higher risk dividends.
But Is The Philip Morris Dividend Safe?
On the other hand, I believe the Philip Morris dividend is safe.
It is supported by:
- Stable and consistent earnings and cash flows
- Investment-grade credit ratings
- Management’s past dividend record
- Management’s stated policy to use cash flow for the dividend
- A business that requires minimal capital investments
It is far more likely that future dividend growth is at risk. Versus a dividend reduction.
Any meaningful financial shortfalls will negatively impact dividend growth. As we have seen in the recent past. As a result, my meager dividend growth forecast of just 2-4% annually.
What I Will Be Watching For…
From a business standpoint, a significant spike in the dividend payout ratios. Or a big change in plain packaging laws. Yes. I will be watching for those things.
But most of all, I will become concerned about dividend safety if and when management elects to hold the dividend constant during their typical annual dividend increase cycle. To that point, Philip Morris normally announces its yearly dividend increase in September.
I will be watching at that time every year. Because for me, an early symptom of an upcoming dividend reduction is a missed dividend increase. Watching and reacting to these things are just good money management.
As for now, I am willing to take Philip Morris management at their word on growth projections. And their ability to profitably transition the business to reduced-risk products. These assertions also support dividend safety.
So, that concludes my review of the Philip Morris dividend. But our stock analysis would not be complete without touching on valuation. So, let’s do that next.
Philip Morris Stock Valuation
Let’s judge value in several ways:
- Dividend Discount Model
- Morningstar fair value estimate
- Price to earnings ratio
Philip Morris Dividend Discount Model
The single-stage dividend discount model (also known as the Gordon Growth model) considers several factors I have discussed thus far.
- Current annual dividend payment – $4.80 per share
- Projected dividend growth – 3.0%
- My desired annual return on investment – 9%
Using these assumptions, the Gordon Growth Model example calculates the fair value of Philip Morris stock at $82 per share.
Philip Morris Stock Price to Earnings Ratio
The Philip Morris stock price to 2019 earnings sits at about 16 times. This is not an excessive valuation, in my opinion.
And, I would not expect Philip Morris to trade at a high valuation. Not for a stock with uncertain growth prospects. Plus, all things being equal, a recovery in 2020 earnings will reduce the PE ratio further.
Will the collective mind of stock market traders comes to believe in the company’s growth potential from reduced-risk products? I’m not exactly sure. But if they do, the value of the stock should trade at a higher multiple.
Morningstar Fair Value
Finally, the investment analysis firm Morningstar believes Philip Morris stock to be fairly valued at $98 per share.
Philip Morris Stock Valuation Summary
We have looked at several valuation methods that suggest a range of values for Philip Morris stock.
Here is a summary:
- Philip Morris dividend discount model – $82 per share fair value
- PM stock price to earnings ratio – Appears reasonable, not excessive
- Morningstar Fair Value Estimate – $98 per share
The value measures show that Philip Morris stock appears to be fairly priced at recent levels. Perhaps the stock is slightly undervalued.
I consider this range to make a Philip Morris stock recommendation for my own purposes. And what I see is a stock reasonably priced for me to make add on purchases to my shares.
I will wrap up and conclude today’s Philip Morris dividend stock analysis in a moment. But first, a few words on where I stand with this investment past, present, and future.
My Experience: Is Philip Morris A Good Stock? Or A Good Investment?
For many years, Philip Morris stock held the second-largest position in my dividend growth stock portfolio.
It was second in size only to Altria, its US counterpart in the tobacco trade. I will admit that is a lot of concentration in tobacco companies at the top of my investment portfolio.
Now, I think about the best practices in money management. Perhaps I should have diversified and sold off part of my position in PM stock.
Just like I am considering today with my now largest dividend stock holding. That being Microsoft stock.
Is Philip Morris A Good Stock?
Philip Morris has not been a good stock. At least not since mid-2017.
Starting at that time, Philip Morris stock went into a steady downtrend. The stock lost nearly 50% of its value from top to bottom.
Although Philip Morris remains one of my top 10 holdings, it suffered a significant loss in value during 2017 and 2018. That has been bad news for my dividend growth portfolio.
Is Philip Morris A Good Investment?
The good news is that I have owned Philip Morris stock since the 2008 spinoff from Altria. And, even with the more recent fall in value, I believe Philip Morris has been and will continue to be a good investment.
Looking back to my early years of ownership, I made additional purchases with both new funds and dividend reinvestment. The stock price ranged from $30-60 per share during that time.
So I still sit on a nice capital gain. Plus, I have collected some big cash from the large Philip Morris stock dividend payout since I stopped reinvesting my dividends about 7 years ago.
Looking forward, I believe management will successfully execute the transition to reduced-risk products. All the while, traditional tobacco cigarettes will remain a cash cow. And support the substantial dividend payouts for investors.
Looking At The Past & My Path Forward With Philip Morris Stock
Do I wish I would have sold and reduced my share count at the stock price peak in 2017? Sure, but hindsight is twenty, twenty as the saying goes.
In contrast, I’m a long term buy and hold investor. I like to hold my dividend-paying stocks forever and collect my monthly dividends.
I’m just not a good enough investor. That is to consistently buy at the bottom and sell at the top.
That is one reason why I like holding dividend stocks for the long term. Dividend stock investing makes timing the market unnecessary. Long-term buy and hold helps smooth out what can be a volatile ride. Just as Philip Morris stock has shown.
Okay. That’s all I have. Thanks for humoring me with that discussion.
Sometimes it helps me to just step back and reflect on my investments from a big-picture view. Maybe you can learn a little from what I went through.
Now, let’s wrap up today’s Philip Morris dividend review and stock analysis with a brief summary.
Philip Morris Dividend Stock Analysis Summary
Here are a few points to take away from this Philip Morris dividend stock analysis.
- The company is in the midst of a massive and uncertain business transition
- Their core cigarette business remains cash-rich & supports the current dividend
- The stock has a high dividend yield of more than 6%
- However, meaningful future dividend growth depends on successfully transitioning the business to RRPs
- The stock appears to be a reasonable value at recent levels
- I may add to my shares at current prices
More Reading About Dividend Investing & Dividend Stocks Like PM
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My Favorite Dividend Investing & Personal Finance Resources
- Trade stocks for free with the Webull app
- Get stock research from Morningstar
- And stock analysis from Motley Fool
- Or dividend stock recommendations from Simply Investing
- Manage your finances for free with Personal Capital
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