Philip Morris International Inc. (NYSE: PM), known for being a top defensive stock, might be looking to entice more investors with an even stronger dividend, or at least one key analyst thinks so. This cigarette giant has been creating solid cash flow through its international brands and robust pricing power, which in turn could result in an even stronger position.

Wells Fargo’s Bonnie Herzog reiterated an Outperform rating with a valuation range of $94 to $96. This rating was driven by the company’s pricing power, strong global brands and the incremental reduction of its risk product platform, which should provide long-term upside in the stock.

The investment bank expects the Philip Morris board of directors to approve a quarterly dividend increase on September 9 of at least 5% to $1.05 per share, implying a very attractive yield of 5.0% and a payout ratio of almost 95%. Although its payout will be quite a bit above historical averages, and PM’s target payout ratio of around 65%, its dividend remains a priority (over currently suspended share buybacks) and management remains committed to returning close to 100% of its free cash flow to shareholders.

Also based on Wells Fargo’s free cash flow analysis, the firm believes there is sufficient “cushion” for a 5% dividend increase this year and in 2016. Therefore, it encourages investors to build bigger positions in Philip Morris since it believes a dividend increase will be a positive catalyst for the stock.

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The key themes that Wells Fargo mentioned in its report were:

• Philip Morris’s robust pricing power remains critical to driving margin expansion and earnings growth.
• Performance in key markets continues to improve. The market decline rate in the European Union continues to moderate, and Philip Morris is taking share. Pricing remains strong in Russia and the relative price gap in the Philippines is narrowing, resulting in improved unit margins/mix. The share in Japan has stabilized.
• Philip Morris’s fiscal 2015 EPS guidance of 9% to 11% growth is conservative in the firm’s view, and Wells Fargo maintains its fiscal 2015 EPS estimate of $4.47, implying 11.7% growth.
• The company has many cost offsets to help mitigate foreign exchange pressures.
• Philip Morris remains committed to developing innovative, noncombustible products, including iQOS, and its national expansions in Italy and Japan remain on track. Also, Philip Morris is distributing Altria Group Inc.’s (NYSE: MO) MarkTen technology under the Solaris brand name in Spain.
• Marlboro 2.0 has been incremental, and increased support should continue to drive upside for the Marlboro brand family. Overall, upside potential for Marlboro 2.0 is broadly underestimated.

Ultimately, Wells Fargo detailed its investment thesis as:

We expect PM to outperform over the long term given its (1) superior and reinvigorated Marlboro brand franchise, (2) its industry-leading, diverse brand portfolio, and (3) its impressive Return on Invested Capital and improving economic profit. Phillip Morris has emerged in a class of its own and we believe it is poised for further growth.

Shares of Philip Morris were down 0.2% to $84.09 Monday morning. The stock has a consensus analyst price target of $87.71 and a 52-week trading range of $75.27 to $90.25.

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