Better Buy: Altria Group vs. Philip Morris

Altria Group (NYSE: MO) and Philip Morris International (NYSE: PM) have a lot in common. Both share a common ancestry, with Altria having spun off Philip Morris nearly 10 years ago. Both benefit from selling the top cigarette brand in the world, Marlboro. Both have also collaborated with each other on alternatives to traditional cigarettes. Yet these stocks are very different from each other, and smart investors understand that one might have substantial advantages over the other when it comes to being the ideal stock for new investment.

With that in mind, you'll find more information here about Altria and Philip Morris to help you decide which one makes more sense for your portfolio right now.

Valuation and stock performance

Altria and Philip Morris have seen their shares move in opposite directions recently. Philip Morris has put in a solid performance, with its share price rising 16% over the past year. Altria, however, has lost more than 6% since September 2016, and even its healthy dividend yield hasn't been enough to give the stock a positive total return for the period.

At first glance, Altria seems to have a huge valuation advantage over Philip Morris. The U.S. cigarette giant has a trailing earnings multiple of less than 10, compared with a heftier 26 times earnings for Philip Morris. Yet the most recent numbers for Altria still include the big one-time gain it earned from its sale of its stake in SABMiller to Anheuser-Busch InBev (NYSE: BUD). Using near-term future earnings estimates gives a much more accurate picture, and although Altria still wins out, its valuation of 18 times forward earnings is a lot closer to Philip Morris' forward multiple of 22 than the trailing numbers would suggest. Nevertheless, Altria takes the win on the valuation front thanks to its lackluster share-price performance recently.

Dividends

Altria and Philip Morris both have reputations for being strong dividend payers. Altria has a big advantage in terms of dividend yield, with the stock paying almost 4.2%, compared with a dividend yield of just 3.5% for Philip Morris.

Altria has also been able to deliver more dividend growth recently. The company just last month announced another 8% dividend increase, marking the 51st time in 48 years that Altria has boosted its quarterly payout to investors. Philip Morris has done a good job of growing its dividend over its shorter history, but the past couple of years have featured just token increases of about 2%, and most investors expect a similarly modest increase later this month. With Philip Morris paying out almost all of its earnings as dividends while Altria maintains a healthier payout ratio, Altria has the current advantage in terms of dividends.

Growth prospects and risks

As always, investors have to ask how Altria and Philip Morris are finding growth. Altria now faces a newly unified front from its primary competitor, as British American Tobacco (NYSE: BTI) has completed its merger with No. 2 U.S. tobacco player Reynolds American to become a global behemoth in the industry. So far, Altria has remained able to offset inexorable declines in unit sales volumes by raising prices to compensate. Yet investors are even more fearful than ever about the risks that Altria faces on the regulatory front, because the U.S. Food and Drug Administration recently proposed the idea of forcing cigarette companies to reduce nicotine levels in their products to non-addictive levels. Altria stock fell sharply following that announcement, and it remains to be seen whether the company can find ways to compensate for added costs if those regulations become reality.

Philip Morris International has been more aggressive about adapting to changing conditions in the tobacco industry, and its initiatives to push alternatives to traditional cigarettes have gained a lot of traction. The iQOS heated-tobacco product has become wildly popular in Japan, and other test markets are showing similarly strong growth trajectories. Philip Morris has responded by ramping up production of iQOS-related products, and it hopes to gain FDA approval for iQOS, at which point it would license the product to Altria for domestic sale. Still, Philip Morris also has to address regulation of its traditional cigarettes, and declines in volumes have been more severe abroad than they've been in the U.S. market.

All told, both Altria and Philip Morris face obstacles to future growth. Altria's poor share-price performance and better dividend are points in its favor, giving it a slight edge over Philip Morris. More importantly, both companies will have to find long-term strategies for survival in a declining industry to reassure investors that they're not on a road to nowhere.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Anheuser-Busch InBev NV. The Motley Fool has a disclosure policy.