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

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.