Better Buy: Altria Group Inc. vs. Coca-Cola

By Markets Fool.com


Image source: Coca-Cola.

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Brand awareness is one of the clearest signs of success for a consumer goods company, and both Altria Group (NYSE: MO) and Coca-Cola (NYSE: KO) have expertly used marketing tools to their shareholders' benefit. Altria's Marlboro brand is known around the world, even though its business is now concentrated on the U.S. market, and you can find Coca-Cola's red cans and cursive writing across the globe as well. Yet both companies have also faced concerns about the health impacts of their products, with government entities looking at regulation and taxation as tools that could also be obstacles to their producers' growth. Given those challenges, investors want to make sure they make smart decisions about which stock they choose for their portfolios. Let's take a closer look at Altria Group and Coca-Cola, comparing them on a number of key measures to decide which one is the better buy.

Stock performance and valuation

Both Altria and Coca-Cola have given shareholders solid returns over the past 12 months. Since Aug. 2015, Coca-Cola has delivered returns of 14%, combining both share price appreciation and dividends. But Altria has dramatically outpaced its soft-drink counterpart, doubling its return at 28%.

Yet even though Altria has seen a larger move upward in its share price, a simple analysis of valuation suggests that the stock hasn't become overly pricey compared to Coca-Cola. Right now, when you look at trailing earnings, Coca-Cola's stock price is about 25 times what it has earned over the past 12 months. Altria weighs in with a trailing multiple of 23, which actually makes it slightly cheaper on that front.

Even when you incorporate expectations of near-term future growth by using forward estimates, the relationship between the two companies' earnings multiples doesn't change. Altria trades at about 20 times forward earnings, compared to a forward multiple of 21 for Coca-Cola. Similar dynamics show up when you use alternative measures like the ratio of enterprise value to pre-tax operating earnings. Based on a quick look at valuation, Altria looks like the more attractive stock, albeit with both companies looking fairly expensive compared to the overall market.

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Dividends

Altria Group and Coca-Cola have treated their shareholders well over time when it comes to paying dividends. Altria's current dividend yield has an advantage over Coca-Cola, but the disparity isn't too huge. Altria pays a 3.7% yield right now, edging out Coca-Cola's 3.2%. The two consumer goods giants have similar payout ratios in the 80% range, which is consistent with their status as slow-growth mature companies with ample cash flow.

The companies have also made it a habit of boosting their payouts regularly. Altria just gave its shareholders a raise, hiking its quarterly dividend by 8% and now paying out $0.61 per share every quarter. That marked the 47th straight year it has made dividend increases, with the only footnote being that Altria's dividend payments have sometimes fallen on a per-share basis in response to corporate spinoffs of its various divisions over time.

For Coca-Cola's part, the soft-drink giant has an even more impressive 54-year streak of annual dividend increases. The company made a 6% boost to its quarterly payment in March, and it pays $0.35 per share every quarter. When you look at the various aspects of their dividend policies, Altria has a slight edge on the yield front, but the advantage is minimal.

Growth prospects and risks

Few investors see Altria Group or Coca-Cola as high-growth prospects because of their long corporate histories. However, both companies have high hopes to drive growth going forward. For Coca-Cola, much of the company's recent emphasis has been on increasing efficiency, and so initiatives like optimizing its pricing practices across its global markets and finding ways to package its products more effectively have helped the drink maker squeeze more profit from its business. Yet revenue in the second quarter of 2016 declined from year-ago levels, and weakness in promising developing markets like China and Argentina have put pressure on sales volumes. Unit case volumes overall was flat during the quarter, but Coca-Cola still thinks it can grow its pre-tax adjusted income by 6% to 8% this year, which is consistent with its long-term goals. However, currency headwinds and structural changes could send Coca-Cola's bottom line down this year, and so investors will have to wait for longer-term investments to start having a measurable impact on the beverage maker's bottom line.

Meanwhile, Altria boosted its full-year earnings guidance in its most recent report after saying that second-quarter adjusted earnings climbed almost 10%. Sliding revenue in the smokeable products division offset strength in the smokeless products and wine segments, but productivity efforts nevertheless helped Altria produce positive changes in adjusted operating company income for all three of its key areas. The pending merger of Anheuser-Busch InBev and SABMiller, in which Altria holds a substantial minority stake, represents a big growth opportunity for the tobacco giant. Moreover, the ongoing ramp-up of the MarkTen e-vapor and e-cigarette brand has long-term promise as a potential growth market.

Both Altria Group and Coca-Cola have ways that they can grow, but right now, most factors favor Altria. Between a less expensive valuation, a higher dividend yield, and a more familiar regulatory framework, Altria has a better handle on the challenges it faces. Coca-Cola will have to keep dealing with rising concerns, and it will take time for the stock to get used to the new world in which it operates.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola. 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.