Better Buy: Sturm, Ruger & Co. vs. Altria

By Dan Caplinger Markets Fool.com

Some investors have trouble investing in companies that make products that make them uncomfortable. As a result, Sturm, Ruger (NYSE: RGR) and Altria (NYSE: MO) often get categorized as being sin stocks.

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However, many investors evaluate stocks in controversial industries the same way they would any other investment. Given how well the two companies have done in recent years, it's a natural question to ask, which one looks like a smarter addition for an investment portfolio right now? Below, we'll look at Sturm, Ruger and Altria by comparing them on a number of common metrics to see which one looks more attractive.

Valuation and stock performance

Sturm, Ruger and Altria have gone in opposite directions over the past year. Altria is up by 26% since February 2016, but Ruger has fallen 20% over the same time period.

Image source: Ruger Firearms.

Typically, you'd expect that, after such a disparate performance, the falling stock would look much more attractive on a valuation basis than the rising stock. Yet at least at first glance, this isn't the case.

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When you compare the two stocks based on their trailing earnings, Altria has a stock price equal to 10 times what it's earned over the past 12 months compared to a trailing earnings multiple of 11 for Ruger. However, Altria's backward-looking earnings are artificially inflated by a one-time gain from its sale of its stake in beer-maker SABMiller.

Looking at future earnings expectations gives a more realistic picture. Based on current estimates, Ruger trades at about 13 times forward earnings. Altria, meanwhile, has a much higher forward earnings multiple of 21. Ruger does look more attractive based on valuation, reflecting what most value investors would have expected given the two stocks' respective price movements.

Dividends

Both Sturm, Ruger and Altria have demonstrated a solid commitment to their shareholders through dividends. The dividend yields on the two stocks are fairly similar, with Ruger sporting a 3.5% yield while Altria weighs in at 3.3%. However, the payout ratio that Ruger has is considerably lower than Altria's payout ratio, again showing the different earnings histories of the companies recently.

In terms of dividend growth, both companies also have been solid performers. Ruger pays a variable dividend linked to earnings, and although dividend investors have had to endure some big swings downward during tough times for the gun manufacturer, the company's prospects have recently tracked upward. Altria, however, has been much more consistent, making 50 dividend increases in 47 years, and finding ways to grow its payouts even when times were tough.

From a dividend perspective, Altria and Ruger have their respective advantages and disadvantages. All in all, the yields are close enough and growth impressive enough to keep the two companies roughly even, with perhaps a slight nod to Altria's longer history.

Growth and risk factors

Both Ruger and Altria have had opportunities to grow, as well as obstacles holding them back. Just earlier this week, Ruger released its 2016 results, which included sales gains of 21% and a 43% rise in earnings per share.The gunmaker said that new products in the firearms segment represented nearly 30% of total segment sales, with several rifles and pistols appearing among the newcomers.

Yet sales growth slowed during the fourth quarter, perhaps because anticipated pressure on lawmakers to support gun-control measures disappeared after the results of the U.S. presidential election. Ruger still believes that new product development is the key to maximizing growth, and with its primary competitor having moved to emphasize other product lines, Ruger now has the status of the purest-play gun manufacturer on the market.

Meanwhile, Altria hasn't seen the recent growth that Ruger has shown. In its most recent report, the tobacco giant said that sales for the cigarette and other smokeable products segment dropped from year-ago levels, and sluggish earnings-growth projections for 2017 were disappointing to some. Rising competition appears to be taking a toll on Altria's growth prospects, and longer-term trends away from traditional cigarettes toward perceived reduced-risk products, like e-cigarettes, could put Altria in a difficult situation going forward.

The company is embracing its own strategy toward cigarette alternatives, but it hasn't been as steadfast in its outlook regarding the industry transformation as some of its peers. Meanwhile, Altria will look to the success of its new stake in beer giant Anheuser-Busch InBev to help contribute to tobacco products going forward.

In the end, Ruger has an advantage over Altria right now, given its cheaper valuation, higher dividend yield, and better growth. That could change if the gun industry slows down as much as some expect. But with more of a margin of safety, Ruger should be able to weather those potential problems and bounce back from its share-price declines in the future.

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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.