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Philip Morris International: Dividend Coverage Improving
Stock Analysis & Ideas

Philip Morris International: Dividend Coverage Improving

Philip Morris International (PM) is a leading international tobacco company that is evolving its portfolio for the long term beyond tobacco and nicotine.

Philip Morris was spun-off from Altria Group (MO) in 2008. The spin-off allowed Altria to stay focused on the U.S. domestic market, while Philip Morris took charge of the international markets.

Since then, Philip Morris has managed to produce robust cash flows through its diversified revenues. While demand for cigarettes has been in decline for years, the company has managed to mitigate any declining shipment volumes via price increases.

Further, with its IQOS product seeing great success, the company is becoming increasingly better positioned for a smoke-free future.

Philip Morris has historically served income-oriented investors adequately due to its predictable and quite stable revenue generation.

While concerns over dividend coverage had risen over the past few years, the company’s recent performance and management’s outlook should fade such concerns away. I am bullish on the stock.

Latest Results & Outlook

Philip Morris’ Q4 and full-year results came in very strong, with net revenue reaching $8.1 billion, 8.9% higher versus the prior-year period. Consequently, the company ended the year with record revenues of $31.4 billion, the highest in its history.

Shipment volume increased 4.2% collectively, including cigarette shipment volume growing 2.4% and heated tobacco shipment volume, a yet smaller portion of the company’s total revenues, 17% higher year-over-year.

These numbers are very impressive, as these days it is expected to see declining shipment volumes in the Cigarette division. Seeing growth in this segment should reassure investors that normal cigarette consumption is not shrinking as fast as many assume.

Amid a robust top line, adjusted earnings per share came in at $1.35, an increase of 7.1% versus the comparable period last year. For the full year, adjusted EPS landed at $5.83 versus $5.16 in fiscal 2020.

Moving into 2022, management remains optimistic, expecting to achieve adjusted EPS between $6.12 and $6.30. Excluding currency effects, management estimates that adjusted EPS should land between $6.57 and $6.75 in fiscal 2022, as the entirety of Philip Morris’ cash flows is received in currencies other than USD.

Dividend Coverage Improving

Altria is unofficially referred to amongst investors as a Dividend King, numbering 52 years of consecutive annual dividend increases. Since Philip Morris spun off from Altria, it has also continued to raise its dividend on an annual basis without interruption. Hence, one can technically think of Philip Morris as a Dividend King as well.

While the pace of dividend hikes has slowed down over the past few years, with the latest hike at ~4.2%, the 5.3% yield should adequately suffice income-oriented investors’ needs.

Further, amid stabilization in the decline of tobacco shipment volumes, continued price increases, and a more pleasing margin mix, the dividend payout ratio has been consistently improving.

Specifically, regarding margins, acceleration of iQOS in international markets has led to boosted net income amid HEETS expanding the company’s margin mix. For instance, last year, the company’s adjusted operating income margin improved from 29.6% to 33.2%.

At the midpoint of management’s EPS outlook for this year, the payout ratio stands 81%. This is an improvement compared to 82% last year, and 92% in 2020.

Wall Street’s Take

Turning to Wall Street, Philip Morris has a Moderate Buy consensus rating, based on four Buys and three Holds assigned in the past three months.

At $108, the average Philip Morris stock projections imply 16.9% upside potential.

Conclusion

Investors have become increasingly worried about the viability of big tobacco as an investment over the long term. Philip Morris’ investment case appears relatively robust, nonetheless.

With IQOS positioning the company for a smoke-free future, margins improving, and management’s outlook remaining exciting, I believe that the stock and its juicy yield should continue serving income-oriented investors rather satisfactorily.

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