Philip Morris relying on e-alternatives

Philip Morris International (NYSE:PM) shocked markets last year when it voiced concerns that smokers hooked on traditional cigarettes may take longer to shift to alternative products. In its first quarter update released in April 2018, uptake of alternatives such as vaporisers and e-cigarettes in key markets such as Japan was “less rapid than initially projected”. The comments sent the shares into the largest decline since Philip Morris went public in 2008. 

A prime concern for investors selling shares may have been the sustainability of future dividend payments. Tobacco manufacturers are relying on sales of alternatives to make up for declining cigarette volumes over the longer term. If this does not materialise, historically generous dividend payments could be at risk.

The answer could lie in tobacco alternatives. Chief executive André Calantzopoulos has described these so-called reduced-risk products “the catalysts to accelerate our business growth and secure the long-term future of our company”, as well as the sustainability of its earnings and dividend growth. At the 2018 full-year results, Philip Morris reiterated the view that “reduced risk” products are expected to “play an increasingly important role” in the future of the company, but added that the expected rate of growth of these products is harder to predict. This has prompted the company to revise the way it forecasts EPS to just the minimum expectation, and then revise up from there. 

So far, such a shift has not affected the company’s dividend policy, though. In 2018 regular quarterly dividend payments increased 6.5 per cent to an annualised rate of $4.56 (£3.46) per share. Since its spin-off in March 2008, Philip Morris has increased its regular quarterly dividend by a compound annual growth rate of 9.5 per cent, or by 147.8 per cent from the initial annualised rate of $1.84 a share. This gives a dividend yield of 5.2 per cent that is 1.15 times covered.