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

By Dan Caplinger Markets Fool.com

If you want high dividend yields among blue-chip stocks, it's hard to beat the payouts thatPhilip Morris International(NYSE: PM)andVerizon(NYSE: VZ)offer. Despite operating in completely different businesses, both the cigarette manufacturer and the wireless network giant have been able to look for promising growth opportunities while defending their already impressive empires.

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For investors looking to buy into high-yielding dividend stocks right now, the question is which one of these two stocks makes more sense. Below, we'll help you make that decision for yourself by comparing Philip Morris and Verizon on a number of key metrics.

Image source: Verizon.

Stock performance and valuation

Philip Morris and Verizon have been moving in opposite directions recently, with much different performances over the past 12 months. Philip Morris has given shareholders a total return of more than 20% since March 2016, but Verizon has lagged behind, losing 2% over the same time period.

When you turn to valuation, the disparate performance between Verizon and Philip Morris shows up in the relative value that their shares offer right now. Looking at earnings over the past year: Verizon currently trades at a multiple of about 15 times trailing earnings. That compares favorably to Philip Morris' much more expensive trailing earnings multiple of 25. Moreover, with expectations for modest earnings growth going forward for both companies, a look at valuations based on future estimates gives the same answer. Verizon currently has a forward earnings multiple of 12.5, while Philip Morris trades at more than 20 times forward earnings. Verizon's weaker stock performance has helped give it a more attractive valuation than Philip Morris.

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Dividends

Dividend investors love both Philip Morris and Verizon for their yields. Currently, Verizon offers the better play on this front, with a 4.6% yield that tops Philip Morris' 3.8% dividend payout.

In terms of dividend growth, the two companies have converged over the years. Early in its history, Philip Morris produced much larger dividend increases on an annual basis than Verizon, frequently making boosts of 10% or more. However, more recently, Philip Morris has reduced its dividend growth rate to less than 2%, which has been more in line with the 2% to 4% increases that Verizon has made consistently going back to 2010. However, some investors believe Verizon should have more capacity for future dividend increases because its payout ratio of roughly 70% is well below Philip Morris's current 90% payout ratio. Higher yield and equivalent growth give Verizon the edge on dividends right now.

Growth prospects and risk

The big question for both companies is where they're likely to find future growth. For Philip Morris, the fourth quarter of 2016 brought a nice bounce from what had been tepid conditions in recent years. The cigarette giant produced a 9% jump in sales net of excise taxes, and net income jumped by 37% on considerable strength in Asia. Weak shipment volumes were a minor cause for concern, but Philip Morris reported substantial success with its iQOS heated-tobacco system in the Japanese market. Looking forward, Philip Morris expects that reduced-risk products will play an increasingly large role in its overall future success, and the company projected that its 2017 results would likely be stronger than the target range for growth that it typically seeks to reach. With its iQOS application before the U.S. Food and Drug Administration pending, Philip Morris hopes that a win there could give it a huge competitive advantage over its global rivals.

Meanwhile, Verizon has still seen slumping conditions. In its most recent quarterly report, subscriber counts continued to rise, but Verizon posted a 6% drop in operating revenue that sent net income down by a sixth, and also hit adjusted earnings per share. The carrier has sought to shift more toward the wireless side of the business by divesting wireline assets in several markets during 2016, but despite the negative impact on sales, Verizon believes the strategic moves will help its future growth. With the transition from subsidized phones to installment-plan sales progressing nicely, and with Fios internet products gaining traction in key markets, Verizon hopes to bounce back in 2017 and future years.

Between these two stocks, Verizon looks like the better buy right now. Despite growth challenges, the telecom giant's more attractive valuation and a higher dividend yield should give most conservative investors the mix of favorable attributes they want in their portfolio. For Philip Morris to improve, it will need to see its earnings grow into its valuation and see reduced-risk product success continue.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Verizon Communications. The Motley Fool has a disclosure policy.