A Dividend That’s Not Up in Smoke

06/04/2009 1:00 pm EST


Charles Carlson

Editor, DRIP Investor

Charles Carlson, editor of The DRIP Investor, says Philip Morris International should have solid earnings, and that will help it pay out or even raise its dividend.

Finding high yields is not easy these days. Treasury securities, money market [funds, certificates of deposit], and passbook savings accounts are paying next to nothing. You can find nice yields on some bonds, but the fixed-income market has had its share of Land mines over the last 12 months.

What about stocks for income? This area, too, has been problematic. Many high-yielding stocks have turned in disastrous performances, with lots of dividend payers not only falling sharply in price but also cutting or omitting their dividends.

[So,] income investors have to be very careful when searching for yield. That’s what makes Philip Morris International’s (NYSE: PM) current yield of 5% especially attractive. And the dividend is taxed at the current preferential rate of just 15%, giving it an extra appeal.

Furthermore, the dividend is safe. Indeed, PM should earn at least $2.85 per share this year, more than enough to cover the current $2.16 per share dividend outlay. The stock is not without capital-gains potential as well, [although] PM is not likely to lead the market during robust rallies.

However, the stock’s defensive qualities should help these shares hold up well during market downturns. Investors can nibble on these shares at current prices and be more aggressive on dips below $40.

PM was spun off from Altria Group (NYSE: MO) in March 2008. The company has seven of the world’s top 15 brands, including Marlboro, the number-one cigarette brand in the world. [It] sells products in approximately 160 countries and controls an estimated 15.6% share of the total international cigarette market outside the US.

While cigarettes are not exactly a growth play in the US, overseas markets still have decent growth potential. Philip Morris is a major player in a variety of emerging markets, including Asia and Latin America, where shipment volumes increased in the first quarter.

The firm has felt the problems in Europe, where shipment volumes fell nearly 4% in the first quarter. [Total] revenue fell 5.5% in the first quarter to $5.6 billion, hurt by the strong dollar. Excluding currency, revenue [rose 6%, while] per share earnings jumped nearly 13% in the quarter.

For 2009 overall, the company has forecast per-share earnings of $2.85 to $3.00. The consensus analysts’ estimate for the year is $3.03 per share. PM has beaten the consensus in each of the last four quarters. Especially if the dollar continues to weaken, the company could beat $3.03 this year. For 2010, Wall Street expects profits of $3.43 per share. Profit growth in 2010 should lead to a dividend increase. (The stock closed Wednesday above $44—Editor.)

When “high yield” often means “high risk,” Philip Morris stands out as one company where income investors can be confident of a steady dividend stream. PM’s dividend-reinvestment plan (DRIP) allows any investor to buy shares directly, the first share and every share.

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