Better Buy: Philip Morris International vs. Altria

By Dan Caplinger Markets Fool.com

Altria Group (NYSE: MO) and Philip Morris International (NYSE: PM) share common roots -- the former spun off the latter in 2008 to divide the world between them. Altria serves the U.S. market while Philip Morris has international scope, but the two have both used the power of the Marlboro brand to build up impressive businesses.

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Yet going forward, the two companies have slightly different approaches to the tobacco industry, and some investors want to know which of the two stocks looks like a stronger pick for the future. Let's look more closely at Philip Morris International and Altria Group to see which one compares more favorably on some key metrics.

Valuation and stock performance

Philip Morris and Altria have both delivered strong results to their shareholders over the past 12 months. Currently, Altria sports the better return -- investors have seen a 25% increase in value since February 2016. Philip Morris stock weighs in with a total return of 18%.

Image source: Altria.

Looking at their respective valuations, a misleading figure could lead some investors to think that Altria is dramatically cheaper than Philip Morris. When you look at trailing earnings over the past 12 months, Philip Morris reports an earnings multiple of 23, while Altria trades at just 10 times trailing earnings. However, Altria's results have benefited from a huge one-time capital gain linked to its sale of its stake in beer-maker SABMiller, and that has artificially skewed the company's price-to-earnings ratio downward.

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When you incorporate future earnings expectations, the gap disappears. Philip Morris trades at a forward earnings multiple of 20 compared to just under 21 for Altria. In terms of performance and valuation, the two stocks are close enough to declare the contest a draw.

Dividends

For dividend investors, the big disparity between Philip Morris and Altria is in yield versus growth. From a current income perspective, Philip Morris pays the higher yield, which is currently 4% compared to 3.3% for Altria.

However, Altria has seen stronger dividend growth recently. Philip Morris International has only managed to produce 2% raises in its dividend in each of the past two years, representing a dramatic slowdown from the double-digit percentage payout growth that its investors enjoyed throughout most of the international tobacco giant's short history as an independently traded company.

By contrast, Altria has kept up its pace of steady dividend growth, with increases of 8%, 9%, and 8% in each of the past three years, respectively. For those who favor growth prospects over current yield, Altria looks like a better bet, although income-hungry investors right now might prefer Philip Morris.

Growth prospects and risks

Some of the dividend growth disparity above has come from challenges that have hit Philip Morris International harder than its domestic counterpart. But Philip Morris is trying to bounce back. In its most recent quarter, the international tobacco giant said that its revenue climbed 9%, sending net income up by nearly two-fifths from year-ago levels. Dramatic growth in the Asian market led Philip Morris higher, overcoming sluggish performance in Eastern Europe, Latin America, and Canada.

Perhaps the most important aspect of the company's success came from its reduced-risk product lineup, where the iQOS heated tobacco product has seen monumental growth in the Japanese market. The company believes that it should be able to restore profit growth to more typical levels, and that could produce a return to faster dividend increases and more favorable prospects for the stock going forward.

Altria, meanwhile, is facing different issues. Its most recent quarterly report featured flat revenue, and as mentioned above, a big profit came from the capital gain on the sale of SABMiller. However, the key smokeable-products segment suffered a revenue decline, and earnings guidance for 2017 called for somewhat slower growth than most investors were expecting to see.

The prospect of heightened competition within the U.S. market came from the move of rival Reynolds American (NYSE: RAI) to merge with British American Tobacco (NYSEMKT: BTI), and some investors are uncertain whether a combined Reynolds and BAT will be more likely to fight harder against Altria than Reynolds has in the past. Altria's efforts with reduced-risk products haven't been quite as big a portion of its strategic vision as Philip Morris International's, and it will be interesting to see how Altria chooses to balance traditional tobacco with reduced-risk products going forward.

Altria and Philip Morris each have their advantages and disadvantages, and choosing between them requires prioritizing various aspects of their businesses. If you think that the international challenges that have held Philip Morris back will disappear, then it looks like a slightly better bet for now than Altria. If you're concerned that the dollar will remain strong and weigh on Philip Morris' results, however, then Altria is the smarter play.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.