Tobacco manufacturing company Philip Morris International Inc. (PM) is known for its smoke-free products, including HEETS Marlboro, Marlboro HeatSticks, and other nicotine-containing vapor products. Shares of the cigarette maker have gained 2.2% over the past five days and 10.5% over the past month as the market expects an impressive fourth-quarter earnings release from the company. PM grew its regular quarterly dividend by 4.2% to an annualized $5 per common share. But the company’s trailing-12-month dividend growth rate of 2.97% is 8.8% lower than the industry average of 3.26%.

While the growing user base of IQOS helped the tobacco giant witness organic net revenue growth of 7.6%, tightness in IQOS device supply due to the global chip shortage could impact its ability to meet demand fully. As a result, finding more growth may be challenging for the company in the upcoming months. Moreover, PM’s management narrowed its full-year EPS forecast to the range of $5.77 to $5.82 from the earlier range of $5.76-$5.86.

Here’s what could influence PM’s performance in the coming months:

Mixed Dividend Story

PM has declared a dividend payment of $1.25 per share for the next quarter, payable on January 10, 2021. Its current quarterly dividend cumulates to an annual dividend of $5, translating into a dividend yield of 5.26%. This compares to the company’s four-year average yield of 5.47%. Also, its dividend payout has grown at a CAGR of 3% over the past three years. However, the CAGR of its five-year dividend payout of 3.5% is 40.4% lower than the industry average of 5.9%.

Lower Shipment Volume in Key Markets

PM’s total shipment volume of cigarettes declined by 7.1% year-over-year in the European Union and 4.5% in South & Southeast Asia. PM’s total in-market sales volume decreased by 0.5% in the EU during the third quarter. Its Bond Street cigarette brand witnessed a 52.8% decrease from the year-ago value to 3.04 million units. The smoke-free products maker’s international market share for cigarettes tumbled 1.1% to 23.8%, reflecting lower cigarette market share in Japan, Philippines, Russia, and Ukraine.

Mixed Growth Potential

The consensus revenue estimate of $7.66 billion for the next quarter ending March 2022 represents a 5.4% increase year-over-year. Also, the company’s revenue is expected to increase 3.3% from the prior-year quarter to $32.33 billion next year. Analysts expect PM’s EPS to rise 6.1% year-over-year to $6.43 in fiscal 2022. Also, it is expected to grow at the rate of 11% per annum over the next five years. However, its EPS is estimated to decline 1.3% next quarter.

Unstable Financials

PM’s net revenue rose 9.1% year-over-year to $8.12 billion for the third quarter ended September 30, 2021. Its operating income increased 6.5% year-over-year to $3.46 billion, while reported EPS surged 4.7% from the prior-year quarter to $1.55. But PM’s net debt stood at $24.6 billion as of September 30, 2021.

The company’s trailing-12-month asset turnover ratio of 0.76% is 12.2% lower than the industry average of 0.87%.

POWR Ratings Reflect Uncertainty

PM has an overall rating of C, which translates to Neutral in our POWR Ratings system. The POWR Ratings are calculated by taking into account 118 different factors, with each factor weighted to an optimal degree. 

Our proprietary rating system also evaluates each stock based on eight different categories. PM has a C grade for Growth and Sentiment. The stock’s uncertain growth prospects and mixed analyst sentiment justify these grades.

In terms of Value grade, PM has a D. The company’s forward EV/Sales ratio of 5.55, which is 179.3% higher than the industry average of 1.99, is consistent with the value grade.

Beyond the grades I’ve highlighted, one can check out additional PM ratings for Stability, Momentum, and Quality here. PM is ranked #4 of 11 stocks in the C-rated Tobacco industry.

Bottom Line

While PM has a long history of paying high dividends, a challenging business environment could lead to the stock losing momentum or witnessing a pullback in the near term. A constrained IQOS device supply and lower shipment volume rate could add to investors’ concerns surrounding the stock. Therefore, we think investors should wait for some improvement in its prospects before investing in the stock.

How Does Philip Morris International Stack Up Against its Peers?

While PM has an overall C (Neutral) rating in our proprietary rating system, one might want to check out its industry peer Vector Group Ltd. (VGR), with an A (Strong Buy) rating.

PM shares were unchanged in after-hours trading Monday. Year-to-date, PM has gained 21.70%, versus a 29.47% rise in the benchmark S&P 500 index during the same period.

About the Author: Imon Ghosh

Imon is an investment analyst and journalist with an enthusiasm for financial research and writing. She began her career at Kantar IMRB, a leading market research and consumer consulting organization. More...

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