Better Buy: Altria Group vs. Coca-Cola

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Altria Group (NYSE: MO) and Coca-Cola (NYSE: KO) have long been bastions of bountiful dividend income for investors. With the tobacco titan and soda giant currently yielding 5% and 3.6%, respectively, that remains the case today.

But which of these dividend stalwarts is the better buy? Let's find out.

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Competitive advantage

Altria once enjoyed a seemingly unassailable competitive position, but the cigarette colossus is now facing potential disruption from new forms of nicotine inhalation, such as vaping. Altria is attempting to counter this threat by introducing new heated tobacco products, but it's not yet clear whether these moves will be enough to offset declining sales of traditional tobacco products.

Like Altria, Coca-Cola finds itself on the wrong side of several trends, as consumers shift away from high-sugar and artificially sweetened beverages. But while its soda business stagnates, Coca-Cola has moved to diversify its beverage empire into naturally flavored juices, teas, and bottled water, among other areas. Coca-Cola therefore enjoys broader revenue diversification than the largely tobacco-focused Altria and a stronger overall competitive position.

Advantage: Coca-Cola

Financial strength

Let's now take a look at some key metrics to see how Altria and Coca-Cola stack up in regards to financial fortitude.

Metric

Altria

Coca-Cola

Revenue

$19.49 billion

$35.41 billion

Operating income

$9.59 billion

$9.43 billion

Operating cash flow

$4.92 billion

$7.11 billion

Free cash flow

$4.72 billion

$5.43 billion

Cash

$1.25 billion

$20.68 billion

Debt

$13.89 billion

$47.75 billion

Altria and Coca-Cola excel at turning cigarettes and soda into cash for investors. However, Coca-Cola has a far more cash-rich balance sheet, which makes it the more financially sound business.

Advantage: Coca-Cola

Growth

With demand for cigarettes and soda likely to decline further in the years ahead, revenue growth will remain a challenge for both Altria and Coca-Cola in the coming years. Still, thanks to price hikes and cost cuts, Altria's earnings per share are forecast to grow by about 10% annually over the next five years. Meanwhile, Coca-Cola's EPS is expected to rise by less than 8% annually over the next half-decade, driven mostly by the company's margin-expansion initiatives. Thus, Altria has the edge when it comes to expected EPS growth.

Advantage: Altria

Valuation

No better-buy discussion should take place without a look at valuation. Let's check out some key value metrics for Coca-Cola and Altria, including price-to-free cash flow, price-to-earnings, and price-to-earnings-to-growth (PEG) ratios.

Metric

Altria

Coca-Cola

P/FCF

22.56

33.78

Forward P/E

12.95

18.99

PEG

1.43

2.73

On all three metrics, Altria's stock is considerably less expensive than that of Coca-Cola. Investors appear to be pricing in the possibility that a slowdown in heated-tobacco product sales could cause Altria to fall short of analysts' growth projections. That may prove to be the case, but at this point, much of this risk is already baked into Altria's stock price. And at these levels, Altria is the better bargain.

Advantage: Altria

The better buy is...

Ultimately, you'll need to decide which of these factors is more important to you. Investors with low risk tolerance will find Coca-Cola's broader revenue diversification and balance sheet strength more attractive. Value investors will likely be more intrigued by Altria's lower-priced stock. Either way, you'll be buying a proven business that should continue to deliver bountiful dividend income for many years to come.

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Joe Tenebruso has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.