Better Buy: Altria or Philip Morris?

In this Motley Fool series, we rank two related stocks on five criteria to determine the better buy.

Today's matchup is the Civil War of Big Tobacco. Brother goes up against brother as we pit Altria (NYSE: MO  ) and Philip Morris International (NYSE: PM  ) . As a refresher, Philip Morris International split off from Altria in 2008. They share the dominant Marlboro brand across the globe, with Altria operating with a 50% market share in the U.S. and Philip Morris International garnering 15% outside the United States (more if you exclude China, which is dominated by virtual monopoly China National Tobacco -- even Philip Morris licenses under China National Tobacco there).

By using five short-of-scientific-but-carefully-chosen criteria, let's determine which of these two is the better buy (assuming we have to buy one).

Round 1: balance sheet
I'd classify the balance sheets of Altria and Philip Morris as "don't try this at home" situations. Altria has a debt-to-capital ratio of 75%, and Philip Morris is up at 83%. With most companies outside the utilities sector, I'd be running scared. But I'm reasonably comfortable with high leverage for each of these companies because their steady businesses generate enough cash flow to easily make interest payments while doling out excess cash as dividends and share buybacks.

Each faces the specter of litigation risk, Altria perharps more immediately in a mature market. That litgation risk increases the balance-sheet danger quite a bit. Rather than accumulate a cash hoard, though, it seems both companies are wisely returning a good bit of capital to shareholders through dividends.

Rank: (1) Altria, (2) Philip Morris.

Round 2: operations
We'll gauge operations by looking at operating margins. When I looked at competitors, I wasn't surprised that the margins for Philip Morris (43%) and Altria (40%) beat competitors British American Tobacco (NYSE: BTI  ) (35%), Reynolds American (NYSE: RAI  ) (30%), and Vector Group (NYSE: VGR  ) (24%). However, it was surprising that Newport and Kent-maker Lorillard (NYSE: LO  ) had the best margins of the bunch at 44%.

But that's just a fun fact. Lorillard isn't in this fight.  

Rank: (1) Philip Morris, (2) Altria.

Round 3: dividends
Altria has the higher dividend yield: 6% vs. 4.5%. However, we should note that Philip Morris has been buying back shares in excess of its dividend payouts! Altria's had buybacks, too, but not at that rate. Even though I named this the "Dividend" category, I'm calling this a tie based on the share buybacks. Rank: (1) Altria and Philip Morris (tie).

Round 4: growth
Altria is making the best of a dying industry in the United States. Volumes in the U.S. have been on the decline, but Altria has been able to increase prices on its inelastically demanded product. Philip Morris International has more growth opportunities in that it can enter new markets and more deeply penetrate existing ones.

Rank: (1) Philip Morris, (2) Altria.

Round 5: CAPS rating
Our Motley Fool CAPS community gives a full five stars to Philip Morris and a solid four stars to Altria. For context, of the 10 tobacco companies rated, three got the max five stars (Philip Morris, Imperial Tobacco Group, and Universal), and one got the minimum one star (Star Scientific (Nasdaq: CIGX  ) ).

Rank: (1) Philip Morris, (2) Altria.

The summary rankings

Category

Altria

Philip Morris International

Balance sheet X  
Operations   X
Dividends X X
Growth   X
CAPS rating   X

There you have it. Philip Morris International won three categories outright and tied with Altria on a fourth. I look at the two as a package deal, though. I own both and think both are good stocks to pick up on dips if you don't mind investing in the tobacco industry. If sin stocks aren't your thing but you still want big dividends, I invite you to grab a copy of our free report: "Secure Your Future With 11 Rock-Solid Dividend Stocks." Each of the 11 stocks presents interesting dividend opportunities outside the tobacco industry, including five whose businesses are just as resilient, if not more so, as those of Altria and Philip Morris. Find out the names of those stocks now.

Fool contributor Anand Chokkavelu owns shares of Philip Morris International, Altria, and Universal. The Motley Fool owns shares of Philip Morris International and Altria Group. Motley Fool newsletter services have recommended buying shares of Philip Morris International. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


Read/Post Comments (5) | Recommend This Article (5)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 05, 2011, at 7:34 PM, dbtuner wrote:

    Don't forget that MO owns 28% of SABMiller and some wine industries in the US as well. The SABMiller portion is worth about $18B and could always be spun out to MO shareholders.

  • Report this Comment On November 06, 2011, at 7:30 AM, TMFBomb wrote:

    @dbtuner,

    Yep, I focused on the tobacco side of the business but that should also be factored in before any buy/sell decision.

    Fool on,

    Anand

  • Report this Comment On November 06, 2011, at 2:32 PM, mm5525 wrote:

    Nice article. PM's debt doesn't overly bother me due to the 5 billion in buybacks per year you mentioned. Before 2011, they were buying back 4 billion per year since spinoff. That's a pretty decent use of debt since they are able to borrow for less than the dividend they'd have to pay out.

    I read a comment somewhere about the eventual notion PM could go private. While I doubt this possibility, each quarter there are less and less shares outstanding. Anyone have any thoughts on such a notion? Could be private in like 20 years at the rate they're going.

    Either way, PM is my top holding by far, and these shares will become more and more valuable as time marches on as the Asia-Pac region in particular seems to be smoking like chimneys. Many in this region are experiencing the middle class for the first time. They own cars for the first time, etc. Obviously massive population growth in the Asia-Pac region as well as India.

  • Report this Comment On November 06, 2011, at 6:08 PM, anarmandaleg wrote:

    Spin offs almost always make more than the parent and in this case, as I understand it, Philip Morris IS the spinoff. I owned both, but sold my Altria stock because it has underperformed PM.

  • Report this Comment On November 06, 2011, at 11:53 PM, mansourg54 wrote:

    Disagree with the analysis. MO did not spin-off PM in order to put itself in a hole. RAI sold its international business to Japan tobacco 10 years ago. Most likely less profit was the reason. Since the Dow low of March 2009, MO stock price appreciated at the same pace as that of PM. Tobacco smoking is not a dying business in the US. People are the same wherever you go and 20% to 25% of the world population smoke. In the US people smoke less because of bad economy and not because of health reasons.

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