Stock Analysis

Here's Why We're Wary Of Buying Philip Morris International's (NYSE:PM) For Its Upcoming Dividend

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NYSE:PM
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Philip Morris International Inc. (NYSE:PM) stock is about to trade ex-dividend in 3 days. You can purchase shares before the 19th of March in order to receive the dividend, which the company will pay on the 9th of April.

Philip Morris International's next dividend payment will be US$1.20 per share, and in the last 12 months, the company paid a total of US$4.80 per share. Calculating the last year's worth of payments shows that Philip Morris International has a trailing yield of 5.5% on the current share price of $87.72. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. We need to see whether the dividend is covered by earnings and if it's growing.

Check out our latest analysis for Philip Morris International

Dividends are typically paid out of company income, so if a company pays out more than it earned, its dividend is usually at a higher risk of being cut. Last year, Philip Morris International paid out 92% of its income as dividends, which is above a level that we're comfortable with, especially if the company needs to reinvest in its business. Yet cash flow is typically more important than profit for assessing dividend sustainability, so we should always check if the company generated enough cash to afford its dividend. Over the last year, it paid out more than three-quarters (80%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

It's good to see that while Philip Morris International's dividends were not well covered by profits, at least they are affordable from a cash perspective. Still, if this were to happen repeatedly, we'd be concerned about whether the dividend is sustainable in a downturn.

Click here to see the company's payout ratio, plus analyst estimates of its future dividends.

historic-dividend
NYSE:PM Historic Dividend March 15th 2021

Have Earnings And Dividends Been Growing?

Businesses with strong growth prospects usually make the best dividend payers, because it's easier to grow dividends when earnings per share are improving. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. This is why it's a relief to see Philip Morris International earnings per share are up 3.1% per annum over the last five years.

Many investors will assess a company's dividend performance by evaluating how much the dividend payments have changed over time. Philip Morris International has delivered 7.5% dividend growth per year on average over the past 10 years. We're glad to see dividends rising alongside earnings over a number of years, which may be a sign the company intends to share the growth with shareholders.

Final Takeaway

Is Philip Morris International an attractive dividend stock, or better left on the shelf? While earnings per share have been growing slowly, Philip Morris International is paying out an uncomfortably high percentage of its earnings. However it did pay out a lower percentage of its cashflow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of Philip Morris International.

Although, if you're still interested in Philip Morris International and want to know more, you'll find it very useful to know what risks this stock faces. Every company has risks, and we've spotted 3 warning signs for Philip Morris International you should know about.

A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.

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