Better Buy: Altria Group vs. Philip Morris

By Dan Caplinger Markets Fool.com

Among tobacco stocks globally, Altria Group (NYSE: MO) and Philip Morris International (NYSE: PM) play key leadership roles in the industry. Since Altria spun off Philip Morris in 2008, the two companies have blanketed the world with their distribution of Marlboro cigarettes and other well-known brand names.

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Yet even though these two companies are very similar in many ways, Altria and Philip Morris have adopted different corporate strategies, and therefore see different prospects ahead. Investors want to know which one is more likely to deliver stronger returns. Let's look more closely at Altria Group and Philip Morris International, using some key metrics to show which one compares more favorably.

Valuation and stock performance

Both Altria and Philip Morris have done well for shareholders over the past year. Altria has produced stronger results, with a 27% total return since March 2016. But Philip Morris isn't all that far behind with its total return of almost 20%.

Image source: Altria Group.

In terms of valuation, Altria and Philip Morris have a lot in common. At first glance, Altria seems to have a decided advantage when you look at its share price compared to its earnings over the past year, because it currently reports a trailing earnings multiple of just 10. That compares favorably against Philip Morris' valuation at 25 times trailing earnings.

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Yet Altria's backward-looking earnings have been inflated significantly by capital gains from the sale of its interest in the SABMiller beer business. Therefore, looking at future earnings expectations makes more sense, and there, the two companies both have a current forward earnings multiple of around 21. Altria and Philip Morris look quite similar both in how they've performed, and what they're worth right now.

Dividends

Altria and Philip Morris are both high-yielding dividend stocks, but the two companies' shares have performed well enough that their yields have come down from previous levels. Altria currently has a yield of 3.3%, but Philip Morris has a slight edge with a 3.8% dividend yield.

For investors who value dividend growth, on the other hand, Altria has been the better bet lately. Altria has consistently raised its quarterly payouts by 8% to 9% every year, taking advantage of earnings growth to share its success with its shareholders. Philip Morris has seen some struggles in the dividend department, and in 2015 and 2016, the company gave investors dividend increases of only 2%.

Even now, Philip Morris is paying out almost all of its earnings in the form of dividends, and that has some income investors worried about its ability to keep up with its U.S. counterpart with quarterly payouts in the future. The disparity will leave dividend investors undecided about whether Philip Morris or Altria is the better stock.

Growth prospects and risks

The big question for both Altria and Philip Morris is where future growth is likely to come from. For Altria, competitive pressure is likely to ramp up as rival Reynolds American (NYSE: RAI) looks to finalize its merger with British American Tobacco (NYSEMKT: BTI) to become a global tobacco giant. That won't immediately affect Altria's status atop the U.S. tobacco market, with commanding market share from Marlboro on the cigarette side and strong performance from smokeless products Copenhagen and Skoal.

Longer term, Altria continues to rely on its pricing power as a driver of profits even in the face of falling sales volumes in the core cigarette market. The company has defied skeptics in the past, but many still worry that there's only so far that Altria can go before falling demand starts to eat into its fundamental business.

Philip Morris International is dealing with global challenges that Altria largely can ignore. Growth performance has been widely different in various regions of the globe, and currency-related pressures have held back Philip Morris' profitability despite its posting reasonably good sales growth in local-currency terms.

To a greater extent than Altria, Philip Morris is banking on reduced-risk products as its long-term growth story, and it believes that its iQOS heated-tobacco platform will be able to duplicate early success in the Japanese market across Philip Morris' entire distribution network. If that happens, Philip Morris foresees potentially winding down its traditional cigarette business in time, marking a huge shift from its current business model.

Altria and Philip Morris both have opportunities and challenges, and making a choice depends largely on what's most important to you. At this point, Philip Morris looks like the higher-volatility play, as it looks at transforming its business, but both stocks have the current income and growth potential that tobacco industry leaders have given their investors for decades.

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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.