Better Buy: Altria Group vs. Verizon

By Dan Caplinger Markets Fool.com

Dividend investors gravitate to high-yielding stocks like Altria Group (NYSE: MO) and Verizon Communications (NYSE: VZ), which have demonstrated a history of being generous with shareholders. Yet the two companies face much different conditions in their respective industries, and both have to deal with challenges that could have an adverse impact on their growth in the future despite having plenty of opportunities as well.

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For those who want to decide whether Altria or Verizon is the smarter pick right now, comparing the two stocks on a number of metrics can shed some light and help you make a better choice.

Stock performance and valuation

Of these two stocks, only Altria has managed to give shareholders solid returns recently. The tobacco giant has produced gains of 17% over the past year. By contrast, Verizon has seen its stock fall since April 2016, and even on a total return basis, the telecom company has lost 2%.

Image source: Verizon.

A look at the valuations of the two stocks creates some confusion if you don't look beyond headline numbers. On a trailing basis, Altria looks like the cheaper stock, trading at less than 10 times earnings over the past 12 months. By contrast, Verizon trades at a higher trailing multiple of 15.

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Yet the backward-looking figures for Altria include a big one-time gain related to the sale of its interest in SABMiller. On a forward-looking basis, the two stocks switch positions, and Altria looks more expensive, with a forward multiple of more than 20. Verizon weighs in at just 12 times forward earnings, giving it the nod in terms of sustainable valuation.

Dividends

With respect to dividends, Verizon has a key advantage. The stock currently yields 4.75%, which dramatically outpaces the 3.4% yield Altria has right now.

In terms of sustainability, both Altria and Verizon have similar profiles. Verizon has historically had lower payout ratios than Altria, but the telecom giant has seen that number trend higher as it goes through its business cycle. Again, Altria's payout ratio is artificially low based on extraordinary items in its earnings, but on a forward basis, both appear to weigh in around 70% to 80%.

Altria has been more generous than Verizon in providing dividend growth. For instance, Altria's most recent boost to its payout was 8%, and its annual increases go back nearly half a century when you adjust for spinoffs. By contrast, Verizon's latest increase amounted to just 2%, and that's more in line with what the telecom company has traditionally done for shareholders. On the dividend front, Verizon and Altria both have pros and cons about which investors can reasonably disagree.

Growth and fundamentals

As companies with long histories, Altria and Verizon have had plenty of growth opportunities, but they also face the challenges of being industry leaders. For Verizon, immense competition among wireless carriers has forced the company to offer large incentives in order to keep existing subscribers and attract new ones. The payoff has been less than stellar, with the company reporting nearly two-thirds fewer new phone subscribers in the fourth quarter of 2016 than it did in the previous year's fourth quarter. Operating margin figures have plunged because of the incentives, putting pressure on Verizon's bottom line. Verizon is hopeful that those trends will reverse as replacement cycles occur, but strategic moves from wireless rivals could throw a wrench into those expectations going forward.

Altria, meanwhile, continues to balance falling cigarette volume against price increases to keep revenue and profit moving higher. In February, the company said it expects earnings growth for 2017 to come in between 7.5% and 9.5%, which is in line with Altria's historical target. However, new challenges are on the horizon, including a newly imposed $2 per pack increase in the cigarette tax in California, which is a key market for Altria and its tobacco industry peers. Moreover, the looming merger of rival Reynolds American with international industry player British American Tobacco could result in new competitive pressures for Altria. On the opportunity side, efforts to promote reduced-risk products have picked up substantially, and some believe the market for cigarette alternatives like heated-tobacco products could eventually become larger than Altria's core cigarette business. Those promises are likely a long way off, but efforts to move forward are putting Altria in position to reap rewards as the industry evolves.

The greater growth prospects for Altria right now justify a somewhat higher valuation, but many investors will prefer Verizon's higher dividend yield and exposure to the cutting-edge wireless network industry. Neither stock is a slam-dunk winner right now, with both having pluses and minuses that could sway investors in different directions.

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