Better Buy: Philip Morris International, Inc. vs. Verizon

By Markets Fool.com

Investors love the strong returns and dependable income that dividend stocks have given them over time. Global tobacco specialist Philip Morris International (NYSE: PM) and wireless telecom giant Verizon (NYSE: VZ) have solid track records of delivering dividend payments to their shareholders during their corporate histories. Even though the telecom and tobacco markets have very different characteristics, both Philip Morris and Verizon have sought to reward their investors with rising payouts over time. Yet the climate for dividend stocks is getting somewhat less favorable, and those looking for good dividend stocks want to know which of these two is the better pick right now.

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Let's take a closer look at Philip Morris and Verizon, comparing them on a number of metrics to see which one looks more attractive right now.


Image source: Verizon.

Stock performance and valuation

Both Philip Morris and Verizon have given shareholders impressive returns over the past 12 months, but the cigarette maker takes the win. Philip Morris has jumped 38% since Sept. 2015, compared to a 24% total return for Verizon over the same period.

However, when you look at valuations, the stronger performance of Philip Morris has resulted in a pricier earnings multiple for the stock. When you look at trailing earnings over the past 12 months, Philip Morris trades at a multiple of more than 24. That compares to just 15 times trailing earnings for Verizon, and even though that valuation has risen over the past several months, it still gives the telecom company a major advantage.

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Similarly, when you incorporate future earnings expectations into the mix, Verizon retains its lead. The telecom company has a forward earnings multiple of 13, and that's far less than the nearly 21 times forward earnings at which Philip Morris stock trades. That's a big enough difference to give Verizon a solid edge over Philip Morris in terms of valuation.

Dividends

Most investors are drawn to Verizon and Philip Morris for their dividends, and both of them have attractive yields right now. Currently, Verizon has a slight edge, paying a 4.3% dividend yield compared to just over 4% for Philip Morris.

Both Verizon and Philip Morris have done a good job of rewarding shareholders with rising payouts. Verizon has consistently increased its payouts every year since 2005, while Philip Morris has done so each year since becoming a separately traded public company in 2008. Philip Morris has made bigger payout increases over time, having more than doubled its dividend over that time frame. Verizon has been more conservative with increases, with its most recent increase having been less than 3%.

One area in which Verizon has a bigger advantage is in terms of potential dividend growth. Currently, Verizon is paying out less than two-thirds of its earnings to shareholders as dividends, and that gives it some latitude in considering future increases. By contrast, Philip Morris International's payout ratio is close to 100%. That might not stop the tobacco company from making future dividend increases, but it is likely to make them smaller than they'd otherwise be. For instance, Philip Morris gave investors just a 2% increase last year, which was uncharacteristically small.

All in all, both Verizon and Philip Morris are attractive on the dividend front, making them roughly equal on that score.

Growth prospects and risk

Both Philip Morris and Verizon have growth opportunities and difficulties to overcome. The biggest problem that Philip Morris has faced in recent years has been the strength of the U.S. dollar, which has single-handedly kept the tobacco giant from posting much more significant growth in revenue and earnings. Recently, though, the pace at which the dollar has strengthened against key foreign currencies has slowed, and that has boded well for Philip Morris in removing some of the pressure from its top-line and bottom-line growth. Regulatory efforts like plain packaging and reduced-risk product guidelines have created some concerns among shareholders as well. For its part, Philip Morris remains committed to moving forward with its reduced-risk product innovation, and early results for its iQOS heat-not-burn product line has been extremely encouraging as a potential driver of future growth.

Verizon faces challenges of its own. Despite the strength of the U.S. wireless industry, Verizon has faced difficulty in sustaining its own growth. In its most recent quarter, adjusted operating revenue fell 3.5% on a comparable basis, ignoring the impact of acquisitions and divestitures. The company has done a good job with its customers, adding 615,000 postpaid net additions in the wireless business in the second quarter and maintaining churn rates below the 1% level. Yet labor issues hurt the company's wireline business, and Verizon predicts that its 2016 adjusted earnings will be at best comparable to 2015's levels. A lack of bottom-line growth stands out in what most see as a growing business, especially on the wireless and broadband fronts. Yet many investors believe that moves like divesting part of its landline business will help Verizon focus on its better prospects for the future.

Overall, both Philip Morris and Verizon have opportunities to thrive and obstacles that could hold them back. A pause in the strengthening dollar could give Philip Morris a nice boost from its challenges in recent years, but in the long run, Verizon looks to have a more sustainable growth business to go with its attractive valuation and strong dividend.

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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.