Philip Morris – A Dividend Stock To Consider

The Company has a hefty dividend yield of 4.8% as of this writing. This is an excellent starting yield for those income-driven investors—especially those investors who are leaving the bond market looking for higher yields. Income-driven investors may want a 4.5% yield or higher. So, Philip Morris meets that criteria easily. 

Philip Morris’s current dividend yield is about 35 basis points higher than its own 5-year average dividend yield of 4.44%. I like to look at this metric because it gives me a good idea if a company that I am researching is undervalued or overvalued based on the current yield and 5-year average yield. Price and yield correlate with one another. If the price goes higher, then the yield goes lower. Vice versa as well.

Is the dividend safe? We should always ask this question if we are looking for an undervalued dividend growth stock to invest in. Sometimes undervalued dividend stocks can present us with a “value trap,” and the stock price can continue to head lower.

This is why it is essential to look at the dividend payout based on earnings and free cash flow (FCF). Analysts predict that Philip Morris will earn $6.10 per share for the fiscal year (FY)2021.  Analysts are pretty accurate when predicting Philip Morris's futures earnings. Philip Morris is expected to pay out $4.80 per share in dividend for the entire year. Using the dividend payment gives us a payout ratio of 79% based on earnings. Having a 78% dividend coverage with a dividend yield of over 4.5% gets me very excited. On a free cash flow basis, Philip Morris has a dividend payout ratio of 78%. Thus, the dividend is decently covered in both earnings and free cash flow. 

On another note, capital expenditures have been decreasing for the past few years. The Company spent $1,436 million in 2018 and spent $600 million last year. All while increasing free cash flow each year. 

Philip Morris Revenue and Earnings Growth / Balance Sheet Strength

This section will look at how well Philip Morris has grown earnings and revenue throughout the years. When evaluating a company, these two metrics are at the top of my list to consider. Without revenue growth, a company can’t have sustainable earnings growth and cannot continue paying out a rising dividend.

For the past ten years, Philip Morris has revenue that has been decreasing at Compound Annual Growth Rate (CAGR) of (-0.9%). The decrease in revenue has to do with currency exchanges as the Company makes it money internationally then coverts it’s to US dollars. Net income also decreased during this ten year period at a rate of (-0.7%).

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Disclosure: Long PM.

Author Bio: My name is Felix, and I am a Dividend Growth Investor who has been investing in dividend growth stocks for the past seven years. I also run a YouTube channel ...

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