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Consistent earnings power is the key to maintaining a dividend. In order to pay a plump dividend year after year, a firm needs a business that generates a reliable stream of cash. Earnings alone might not show the whole picture, though. It is possible to keep earnings steady despite weakening revenues, just by cutting costs. But eventually, such a company in a declining market will exhaust the possibilities for cost-cutting, and earnings will fall.
Philip Morris has been a slow but consistent grower in recent years, with revenue inching up 3% per year. Earnings, for the most part, have been consistent, as well. The only recent exception has been in 1998, when earnings dipped 15% year-on-year, which explains the spike in the payout ratio: Philip Morris maintained its dividend even though earnings softened. One major potential threat to the company's earnings, though, is tobacco lawsuits. That's why it's important to consider Philip Morris' cash flow.
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Does the Company Generate Consistent Free Cash Flow? >>
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