Tobacco company Philip Morris International (NYSE: PM) has increased dividends annually since it was spun off from Altria Group in 2008. The board of directors last raised the payment in October.
It's important to look beyond the current level and past increases, however. While everyone likes higher payouts, particularly dividend-seeking investors, it's imperative for investors to do some digging to see if Philip Morris can sustain the payment.
The dividend
Philip Morris pays $1.30 a quarter, or $5.20 a year. That equates to a 4.5% dividend yield, more than 3 times the S&P 500's 1.4%.
It's useful to check free cash flow (FCF) to see if the company can afford the dividends. Philip Morris' 2023 FCF was nearly $7.9 billion, but it spent almost $8 billion on dividends. During the first half of this year, its $4.1 billion in dividends covered the payments by just $22 million. That's not much of a cushion, however.
Shifting business
Management has been pushing smoke-free products, which accounted for about 38% of Philip Morris' second-quarter revenue, up from 35.4% a year ago.
But that still means it relies on combustible tobacco products for most of its top line. Cigarettes accounted for about 80% of the quarter's shipment volume. The number of units grew 0.4% year over year, but the international market share dipped from 25.5% to 25.3%.
Revenue from combustible products edged up 1.2% to $5.9 billion. Smoke-free products' revenue grew 13.6%. Philip Morris will likely need to keep growing this business to sustain profitability to generate FCF that will fund dividend increases over the long run.
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Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool recommends Philip Morris International. The Motley Fool has a disclosure policy.
