Last week, the board of directors of tobacco giant Philip Morris International (NYSE:PM) approved a 20.3% increase in its quarterly dividend to 77 cents per share. This was the fourth consecutive annual dividend increase for the company since it was spun off from Altria Group (NYSE:MO) in 2008.
In a previous article, I outlined a few reasons why I am buying Philip Morris International now. The company is well positioned to capitalize on its strong brand in emerging economies, while having the benefit of reduced liability risk in developed countries, since its operations are diversified on a global scale. Phillip Morris International expects to generate earnings growth that will provide shareholders with a rising stream of dividend income over time. The stock also spots a higher-than-average dividend yield, which makes it irresistible for income investors. Check out my analysis of the stock.
The current dividend increase was the company’s largest ever. The previous three dividend increases were for 17.4%, 7.4% and 10.4% in 2008, 2009 and 2010. Analysts are expecting this tobacco giant to earn $4.78 per share in 2011, followed by $5.23 per share in 2012. The company’s forward dividend payout ratio is at 64%, which is sustainable.
Philip Morris International derives 37.6% of its profits from the EU, 27.5% from Eastern Europe, Middle East and Africa, 26.6% from Asia and 8.3% from Latin America and Canada. It is growing through continued product innovation, cost cutting and acquisitions, as well as through organic growth in some emerging markets in Asia and Latin America. There are some risks to investing in tobacco companies, as increased regulation will make the operating environment more difficult.
Currently, Philip Morris International is attractively valued per my entry criteria, trading at 14.4 times earnings and yielding 4.5%. True, PMI hasn’t increased dividends for more than 10 years, but there are several factors that make me ignore this criterion. The fact the predecessor company off which PMI was spun had raised distributions for four decades and the fact PMI has raised dividends every year since the spinoff provide enough evidence this company likely will maintain the dividend growth culture of legacy Phillip Morris.