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Don't Buy Philip Morris International Inc. (NYSE:PM) For Its Next Dividend Without Doing These Checks

Simply Wall St

Readers hoping to buy Philip Morris International Inc. (NYSE:PM) for its dividend will need to make their move shortly, as the stock is about to trade ex-dividend. You can purchase shares before the 20th 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$1.17 per share, on the back of last year when the company paid a total of US$4.68 to shareholders. Calculating the last year's worth of payments shows that Philip Morris International has a trailing yield of 5.9% on the current share price of $79.5. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.

Check out our latest analysis for Philip Morris International

If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. Last year, Philip Morris International paid out 100% 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. A useful secondary check can be to evaluate whether Philip Morris International generated enough free cash flow to afford its dividend. Over the last year, it paid out more than three-quarters (78%) of its free cash flow generated, which is fairly high and may be starting to limit reinvestment in the business.

It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and Philip Morris International fortunately did generate enough cash to fund its dividend. If executives were to continue paying more in dividends than the company reported in profits, we'd view this as a warning sign. Extraordinarily few companies are capable of persistently paying a dividend that is greater than their profits.

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

NYSE:PM Historical Dividend Yield, March 15th 2020

Have Earnings And Dividends Been Growing?

Stocks with flat earnings can still be attractive dividend payers, but it is important to be more conservative with your approach and demand a greater margin for safety when it comes to dividend sustainability. If business enters a downturn and the dividend is cut, the company could see its value fall precipitously. With that in mind, we're not enthused to see that Philip Morris International's earnings per share have remained effectively flat over the past five years. It's better than seeing them drop, certainly, but over the long term, all of the best dividend stocks are able to meaningfully grow their earnings per share.

The main way most investors will assess a company's dividend prospects is by checking the historical rate of dividend growth. Since the start of our data, ten years ago, Philip Morris International has lifted its dividend by approximately 8.0% a year on average.

To Sum It Up

Should investors buy Philip Morris International for the upcoming dividend? The company has not generated any growth in earnings per share over the ten-year timeframe we measured. Plus, Philip Morris International's paying out a high percentage of its earnings and more than half its cash flow. Bottom line: Philip Morris International has some unfortunate characteristics that we think could lead to sub-optimal outcomes for dividend investors.

Having said that, if you're looking at this stock without much concern for the dividend, you should still be familiar of the risks involved with Philip Morris International. To help with this, we've discovered 2 warning signs for Philip Morris International that you should be aware of before investing in their shares.

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.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Thank you for reading.