It is always interesting to see how companies trades at ex-dividend dates. While a company's dividend date of record is public information, traders and investors trying to game a possible dividend raise often take positions ahead of the actual payout.
While the S&P 500 and its tracking exchange traded fund, SPY, is up over 25% from the lows of last year, dividend stocks have consistently outperformed the broader indexes for several years.
Few dividend stocks have been more popular than Philip Morris International (PM).
Philip Morris International is a nearly $150 billion dollar tobacco company doing business in over 160 countries. The company's two biggest markets are Asia and Europe, and Philip Morris International gets around 40% of its revenues from both these regions, with the Japan and the EU being the company's biggest markets. Philip Morris International gets around 20% of its revenues from Eastern Europe, the Middle East, Africa, Canada, and Latin America. Unlike the company's peer, Altria (MO), Philip Morris International does not business in the U.S.
While Philip Morris International gets around 40% of its revenues from Europe, and 30% from the EU, the stock is up over 50% in the last year despite the weak economic outlook in this troubled region. Phillip Morris International had volume growth of over 20% in Asia primarily because the earthquake and subsequent tsunamis prevent the company's biggest competitor in Japan, Japan Tobacco, from shipping cigarettes for several months. Philip Morris International's revenues in the EU fell nearly 10% last quarter, and the company's revenues in Latin America and Canada have been flat for several quarters. The company did have some impressive results in Eastern Europe, Russia, and in some emerging markets, but the year-over-year comparisons in these markets were misleading, and these are not major markets for the company.
Philip Morris International offset consistent and significant weakness in the EU and the Euro because of the company's very impressive growth in Asia over the last year.
Still, the company's near-term growth prospects in Asia are limited. The Philippines and Indonesia are proposing significant new tobacco taxes, and Japan Tobacco has already launched several successful new products since last year.
I've written several articles over the last year recommending Philip Morris International, since the company has consistently been incorrectly viewed as a European based company, but the company faces significant near-term challenges.
Philip International's recent growth levels in Asia are unsustainable, and the company's EU revenues decline more in the last quarter than the company saw all of last year. The recent PMI data from Germany also suggest the core of Europe has significantly deteriorated in the last quarter, and China and Japan have reported significantly deteriorating economic data in the last month as well.
This is also why I think the recent price action in the stock is so interesting. Even though the stock usually runs up into the September dividend, which is when management usually announces annual dividend increases, the stock has consistently lagged the S&P 500 and most of its tobacco peers by a wide margin over the last several weeks.
Philip Morris International has underperformed the broader indexes by nearly 5% over the last week, and underperformed tobacco peers such as Altria by nearly 3% as well.
While short-term price action can obviously be misleading, the significant recent underperformance of this company leading up to the likely dividend raise is important. Philip Morris International is up over 50% in the last year, and the stock has consistently outperformed the broader indexes and most of its tobacco peers for some time. Philip Morris' ex-dividend date is well known, and the management has consistently raised the dividend in September. If the company is underperforming most of the benchmarks and its tobacco peers prior to its upcoming ex-dividend date, the stock is likely to sell-off hard once the company goes ex-dividend.
To conclude, many traders like to try and game dividend payouts, and stocks often rise into dividend payout dates, and fall afterwards. Philip Morris International trades nearly 19x trailing estimates and nearly 16x likely earnings estimates for next year, but the company's revenues in Europe have deteriorated significantly in the last several quarters, and the company's recent growth in Asia and Eastern Europe is unsustainable. If the company's growth rate slows 3-4% and shares stagnate, the nearly $6 billion a year buyback plan will provide no value to shareholders, and the company's high debt levels will likely make future dividend payments increasingly difficult. While dividend stocks have been the best performing stocks over the last year, past performance is not always indicative of likely future results.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.