The day many investors were waiting for is here. No, I'm not talking about the iPhone release. I'm talking about the dividend increase we were expecting from Philip Morris (PM). On Wednesday morning, Philip Morris announced that it was raising its quarterly dividend. Despite the news, shares sold off, and that provides an excellent opportunity for long term investors to get in.
Now I've detailed in the past that I expected a raise to approximately $0.85 per quarter, and that is exactly what we got. This is an increase of 10.4%, and means that Philip Morris will now pay $3.40 per year in dividends. This is in addition to the roughly $6 billion they will buy back in shares each year for the next couple of years. The dividend will be payable on October 11th to shareholders of record as of September 27th. The ex-dividend date is September 25th.
Based on Wednesday's close, Philip Morris is now yielding 3.92%. That puts it more in-line with other big cigarette names, and like I said, Philip Morris has the huge buyback as well. Currently, Altria (MO) is yielding 5.29%, Lorillard (LO) is yielding 5.36%, Reynolds American (RAI) is yielding 5.46%. Those yields are up a bit from recent levels, as these names have declined a bit in the past week. Lorillard was down over 4% on Wednesday alone.
Now just last week, I said that Philip Morris was approaching the sweet spot. By that, I meant that it was coming down to an attractive entry point for investors. At that point, Philip Morris had come down more than $4 since its recent high of $93.60. I stated that the best entry price, based on expected 2013 earnings, was $84.81. At that point, I didn't see these names declining so much, so I encouraged investors to start entering the name around $87.84 if they got the chance. Philip Morris closed Wednesday at $86.67, so it is basically into my range now. If the markets don't like the Fed decision on Thursday, it is entirely possible that we could see that below $85 level.
Now Philip Morris still trades at a premium to others in the space, including British American Tobacco (BTI). The following chart shows the price to earnings valuations for each based on the currently expected earnings for each year.
Now I've noted that Philip Morris has traded at a premium to these other names for a while now. Today's dividend increase decreases that premium a bit, since you are getting the extra 32 cents a year. As I noted in my past article, Philip Morris is near the top of the industry when it comes to growth expectations for this year and next. Add that in with a near 4% dividend, plus billions in buybacks, and you can see why this stock remains an investor favorite.
Wednesday's news that Philip Morris was increasing its dividend was not surprising, and the dividend raise was right to where I thought it would be. Philip Morris now yields 3.92%, a large jump from the 3.29% we saw just recently at the 52-week high. Philip Morris remains strong, and the dividend increase this week proves that fact. Philip Morris investors will be celebrating this increase, while other investors may now decide this is the right stock for them. The stock has now pulled back $7 from its high, and that provides an attractive opportunity to get in. However, investors could get an even better opportunity over the next few days if the Federal Reserve disappoints.