Better Buy: Altria Group Inc. vs. Verizon

By Markets Fool.com


Image source: Altria.

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Dividend stocks have historically produced strong returns and dependable income for investors, and few stocks have done a better job at delivering dividends consistently than Altria Group and Verizon . The two companies obviously serve very different markets, but each has remained committed to giving shareholders reliable quarterly payments for decades. Yet investing in stocks also requires paying a fair price for shares and looking at potential growth, and investors looking for a good dividend stock need to consider those other factors as well. Let's take a closer look at Altria Group and Verizon, comparing them on a number of metrics to see which one looks more attractive right now.

Stock performance and valuation

Both Altria and Verizon have given shareholders positive returns over the past 12 months, but the cigarette maker has a big lead over the telecom giant. Verizon has provided investors with a total return of about 8% since May 2015, but Altria's gains of 28% dwarf those of its dividend rival.

Differing performance doesn't necessarily equate to big difference in valuation, but in the case of Verizon and Altria, you can see the impact of Altria's outperformance when you look at simple valuation metrics based on stock price and earnings. Focusing on trailing earnings, Altria currently trades at an earnings multiple of roughly 23. Verizon's multiple is just half that, at about 11.5.

Incorporating near-term growth projections narrows the valuation disparity somewhat but not entirely. Verizon's forward earnings multiple is about 12.5, while Altria's expected growth in earnings reduces its forward multiple to 19. Nevertheless, the difference is substantial enough that Verizon has an apparent advantage over Altria in terms of valuation.

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Dividends

The prime motivation for many investors to consider Altria Group and Verizon as potential picks for their portfolios is the strong dividend that each pays. Currently, Verizon has the edge in terms of current yield, paying 4.4%. Altria isn't too far behind at 3.5%, and that in part again reflects the share-price appreciation that Altria has seen that in turn has reduced its yield.

What's interesting, though, is that Verizon seems to have more capacity to boost its payout than Altria, at least based on current earnings. Altria's payout ratio is about 80%, leaving it with a fairly thin margin in considering future increases. Verizon, on the other hand, has a 50% payout ratio currently.

Historically, though, Altria's track record of dividend growth is nearly unparalleled. When you account for the fact that Altria has spun off various divisions over time, the company has boosted its dividend in 46 consecutive years. Verizon has a solid growth history that goes back more than a decade, but Altria has also typically had larger increases to its quarterly dividend than Verizon. All in all, the two companies are fairly evenly matched on the dividend front, with Verizon offering higher yields but Altria having been more dedicated to payout growth.

Growth and fundamentals

Both Altria Group and Verizon have growth opportunities and challenges to overcome. For Altria, the trend toward falling cigarette volumes has gone on for years, and it has taken constant assertion of its strong brand and pricing power to keep Altria's overall revenue and profits rising. Cost-cutting measures have been designed to encourage productivity and boost the bottom line, but more interesting are the efforts to innovate in Altria's various segments. For instance, the new Copenhagen Mint smokeless tobacco line has launched to great success, and Altria's salesforce is using the launch as a key point of its overall marketing strategy to its distribution partners. Efforts to embrace reduced-risk products are also ongoing, and the company's exposure to wine and beer both internally and through minority ownership of SABMiller will present interesting profit opportunities in the future as well.

For Verizon, the boom in the wireless industry has gone on for years, and the telecom giant has become a leader in the space. Yet in its most recent quarter, Verizon reported just a revenue gain of less than 1%, and without including acquisitions, the top line would have dropped by 1.5%. Customer counts have remained strong despite aggressive promotional activity from industry rivals, but slowing growth in the FiOS area is a potential trouble spot for future results. In the near-term, a long dispute with union leaders about its labor contract with workers could have impacts on Verizon. If it can retain its leadership role in the industry and stave off a price war, though, then Verizon's long-term growth potential looks considerable.

Overall, both Verizon and Altria Group look like solid picks for dividend investors, but Verizon's valuation advantage gives it a slight edge over the tobacco company. Nevertheless, either one could make a valuable addition to a dividend-focused portfolio.

The article Better Buy: Altria Group Inc. vs. Verizon originally appeared on Fool.com.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Verizon Communications. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.