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Better Buy: Philip Morris International, Inc. vs. Coca-Cola

By Dan Caplinger – Jul 11, 2016 at 10:35AM

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How do these major international powerhouses compare?


Image source: Coca-Cola.

Many U.S.-based companies get a huge portion of their revenue from international markets, and Philip Morris International (PM 0.16%) and Coca-Cola (KO -0.35%) are among the most globally present companies in the U.S. market. For those investors who see the global economy improving in the years to come, getting the best international exposure possible in your stock portfolio is important. To help investors figure out which of these two industry giants they should consider buying, let's compare Philip Morris and Coca-Cola on a number of metrics to see which one looks more attractive under current conditions.

Valuation and stock performance

In terms of total return, both Philip Morris International and Coca-Cola have delivered solid gains, but Philip Morris is the clear winner. The tobacco giant has given investors almost double the return of the soft-drink king, with Philip Morris returning 33% versus Coca-Cola's 17% since July 2015.

Even with Philip Morris stock having climbed faster than Coca-Cola, both sport reasonably close valuations, and if anything, the edge goes to the tobacco producer. Using trailing earnings to consider a simple P/E-based valuation metric, Philip Morris trades at an earnings multiple of about 24, compared to Coca-Cola's higher multiple of 27 times trailing earnings.

Some investors prefer to look at forward earnings as a better valuation indicator. Using estimates, Philip Morris trades at a forward earnings multiple of 21, which is still slightly less than Coca-Cola's 22 times forward earnings. With better returns and a slightly lower set of earnings multiples, Philip Morris looks more attractive by this measure.

Dividends

As dividend stocks, both Philip Morris and Coca-Cola are attractive. Philip Morris has a higher dividend yield at about 4%, but Coca-Cola's 3.1% yield is also well above the market average. On the other hand, Coca-Cola's payout ratio of 80% of earnings is less than Philip Morris' corresponding 95% ratio, indicating that the tobacco giant pays a greater proportion of its earnings to shareholders via dividends than Coca-Cola right now.

Both Philip Morris and Coca-Cola have also grown their dividends over time. Coca-Cola has a 54-year streak of raising its dividend annually, making it a member of the prestigious Dividend Aristocrats list. It has also doubled its payout since 2007. Philip Morris got its pedigree from its former parent before being spun off into a separate company, but in its short history as an independent entity, it has also delivered strong dividend growth. The tobacco company has also doubled its payout since mid-2008. Based on current yield, Philip Morris has the edge, but the comparison on the dividend front doesn't reveal many major differences.

Growth prospects and risks

Fundamentally, both Philip Morris and Coca-Cola have found ways to grow despite facing adversity. Currency impacts have hurt both companies, but Philip Morris has gotten hit especially hard because it doesn't have any U.S. business at all. Growth figures look somewhat more promising on a local-currency basis, but overall shipment volumes fell in the most recent quarter, and the prospect of greater competition could also hurt its potential for future gains. Regulatory efforts have ramped up, putting pressure on Philip Morris and its international peers, and it's unclear how much initiatives like plain-packaging legislation and curbs on smoking in certain areas could hurt the company. Until the company gets some clarity on these issues, Philip Morris stock could struggle to produce further gains.

Coca-Cola is also dealing with issues on the regulatory front, as a growing number of countries and localities consider special taxes on sugary soft drinks and other beverages. Mexico, France, the U.K., and several other European countries have imposed special taxes in an effort to reduce obesity. Philadelphia's adoption of a similar tax has attracted attention in the U.S. to the issue, and other places are likely to follow suit. Efforts to diversify with still and sparkling water, juices, and other drinks have had mixed success, with juice drinks reporting small volume declines in the most recent quarter. Greater spending on marketing has raised some eyebrows, but maintaining the value of the brand will be essential as Coca-Cola plots how to get through tough times.

Based on these three measures, Philip Morris International looks like it has the edge in being a better buy right now. With both companies facing challenges to growth, the tobacco company's higher dividend and lower valuation give it an edge over Coca-Cola.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola. We Fools may not 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.

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Stocks Mentioned

Philip Morris International Stock Quote
Philip Morris International
PM
$97.79 (0.16%) $0.16
Coca-Cola Stock Quote
Coca-Cola
KO
$62.48 (-0.35%) $0.22

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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