A couple of weeks ago, I detailed how cigarette giant Philip Morris (PM) was likely to raise its quarterly dividend in the month of September. The investor favorite has a history of long-term dividend growth, with strong cash flows allowing for solid payouts. After the bell on Wednesday, the company declared its latest quarterly dividend, which represented another solid raise.
Philip Morris will now have a quarterly dividend of $1.20 per share, up 3 cents from the previous amount. This figure was exactly in the middle of the range I was expecting, and it matched the 3-cent raise from a year earlier. In the chart below, you can see the company’s dividend history for its October pay dates since the Altria (MO) spinoff back in 2008. Since some of the yearly raises have come at different times of the year, I decided to go with the October values to keep things consistent.
(Data sourced from Seeking Alpha Philip Morris dividend history page. To see all dividends, click here.)
With this increased payout, based on management’s current guidance, free cash flow should outpace cash dividends in 2020 by about $1 billion. The rest of that money will likely be used for debt repayments and to strengthen the balance sheet. The company’s net debt pile was still more than $25 billion at the end of Q2, although in this low rate environment, there’s not a ton to worry about currently. With about $2.3 billion of debt due by mid-May next year, I’d look for some refinancings if the company can still get decent rates.
At the moment, the thing I’m watching most for the company is the weaker US dollar. A stronger greenback has provided a huge headwind for Philip Morris in recent years, but as the chart below shows, the Dollar Currency Index has come down in recent months. An extra nickel or so in earnings per share each quarter could be delivered, which could add up to a few hundred million extra in net income and cash flow per year at current exchange rates.
While the pandemic has certainly impacted results a little this year, the company is forecast to get back to growth moving forward. If we look at current estimates on the Street, revenues are expected to grow in the mid- to high single digits (percentage-wise) for the next two years, while earnings per share are projected to rise in the high single digits to low double digits for at least the next four years.
Growing the business in the next couple of years will be important for future dividend growth, the potential return of share buybacks, and debt reduction. When you are paying around $7.35 billion or so a year in dividends, free cash flow in the low to mid-$8 billion area doesn’t leave a lot of room for everything else. If Philip Morris can get yearly free cash flow back to the more than $9 billion figure seen in 2019, or even get it to approach $10 billion, it provides management with a lot more financial flexibility.
In the end, Philip Morris rewarded investors again with another solid dividend raise. The quarterly payout was hiked by 3 cents, which means the annual yield is approaching 6% again. Despite recent market turmoil, the stock has held up fairly well, and a weaker dollar will certainly help results in the short term. Investors love this stock for its solid income potential, and today’s news only reinforces that notion.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: Investors are always reminded that before making any investment, you should do your own proper due diligence on any name directly or indirectly mentioned in this article. Investors should also consider seeking advice from a broker or financial adviser before making any investment decisions. Any material in this article should be considered general information, and not relied on as a formal investment recommendation.