Philip Morris: What You Need To Know About That Dividend Increase

| About: Philip Morris (PM)

Summary

Philip Morris raised its dividend 2% last week.

This was inline with expectations.

While a small raise, it continues the dividend growth streak.

Philip Morris has seen its cash flows decline year over year due to currency headwinds.

Philip Morris (NYSE:PM) raised its quarterly dividend by 2% last week to $1.04 per share, or $4.16 annually. This represents the 8th consecutive year of dividend growth for the tobacco giant. This also pushes the yield firmly above 4.2%.

Why such a small increase?

Frankly, that Philip Morris was even able to increase the dividend in 2016 is a testament to its focus shareholder returns. The new dividend represents a 92% payout ratio based on 2016 estimated earnings, a 100% payout ratio based on TTM EPS, and a 90% payout ratio based on estimated FCF. A largely increase was simply not doable with these sort of numbers.

Philip Morris has been seeing falling revenues and earnings as the strong dollar and weakness in overseas currencies have resulted in a considerable forex headwind. For the year, this headwind is expected to reach around $0.40 per share versus earnings guidance of $4.45 to $4.55 per share (which would represent growth of 10-12% versus 2015). In other words, these currency troubles has knocked out at least 9% from Philip Morris' growth rate.

Philip Morris compared to peers

While this was a small dividend increase, Philip Morris is still relatively attractive compared to its tobacco peer group. The 4.2% dividend yield is 30 basis points higher than both Altria (NYSE:MO) Reynolds American (NYSE:RAI), though the yield spread has tightened significantly over the past few weeks from above 100 basis points.

In addition, Philip Morris' valuation is broadly inline with its sector in terms of price to earnings (~21x), price to FCF (~22x) and EV/EBITDA (~17x). It is not expensive, but not cheap either.

Conclusion

Though, I am concerned about Philip Morris' growth outlook compared to peers. Altria and Reynolds are both growing earnings (and dividends) in the high single digit range while Philip Morris has been stuck in neutral since 2014 (back to back years of 2% growth).

To state the obvious, Philip Morris may merit a discount, and higher yield, to its peers due to the slower growth rate. Though, the situation can quickly turn around quickly given any weakness in the dollar.

At the moment, Philip Morris is pretty much fairly valued and I would not add to my position at current prices. In contrast, Atria, which is down 10% over the past couple months, appears to be a better value, with a similar yield and better growth short to medium term.

Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.

Disclosure: I am/we are long PM, MO.

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.