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Better Buy: Altria Group Inc. vs. Reynolds American

By Dan Caplinger – Jun 5, 2017 at 10:39AM

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Which U.S. tobacco stock reigns supreme? Find out here.

Tobacco stocks have been big moneymakers over the years, and Altria Group (MO 0.82%) and Reynolds American (RAI) have emerged as the two top players in the U.S. tobacco industry. For those looking to invest in tobacco, the question is whether Altria or Reynolds American makes a better stock for the future. To help answer that question, you'll see below a comparison of Altria Group and Reynolds American using some popular measures of success. With this information, you'll be better able to decide which stock fits better in your portfolio.

Valuation and stock performance

Both Altria and Reynolds American have done very well for their shareholders recently, but Reynolds American has a decided edge. The company has seen its stock climb by nearly a third over the past year, compared to just a 15% rise in Altria's share price since June 2016.

At first glance, a look at earnings-based valuation metrics makes Altria seem like a much cheaper stock. With a trailing earnings multiple of just 10, Altria weighs in much more cheaply than Reynolds and its trailing P/E ratio of nearly 30. However, the one-time positive boost to Altria's earnings from the sale of its stake in SABMiller is responsible for bringing the Marlboro maker's multiple lower. When you instead look at near-term projections for future earnings, the two tobacco stocks' valuations get a lot closer. Altria still has a slight edge, but its forward multiple of 21 is only a bit smaller than Reynolds and its 25 forward P/E. Overall, Altria looks like a slightly better value.

Glass head smoking.

Image source: British American Tobacco.


Both Altria and Reynolds are strong dividend stocks, and the two are very close to each other right now. Altria has a slight lead with a 3.25% dividend yield, but Reynolds American is only a bit behind at 3%.

In addition, both Reynolds and Altria have consistently raised their dividends over time. Altria's history of regular dividend increases goes back a half century, culminating in its most recent 8% boost in September 2016. Reynolds American came through more recently with a healthy 11% spike in its quarterly dividend payment, and although its history doesn't go back as far, Reynolds has outpaced its rival in the rate of dividend growth more recently.

For both companies, dividends make up a huge part of their overall strategy for returning capital to shareholders. As we discussed above, Altria's earnings are temporarily inflated, and that makes payout ratio comparisons less meaningful. However, when you normalize the Marlboro maker's results, both stocks have payout ratios of around 80%. Dividends are important to both tobacco companies, and their performance is roughly equal on the dividend front.

Growth prospects and risks

The long-term decline in smoking has continued for decades, but both Altria and Reynolds American have answered the call with innovation and dedication. In its most recent quarter, Altria managed to boost overall revenue despite substantially lower shipment volumes of cigarettes, and bottom-line growth was even stronger. Short-term challenges from a recall of smokeless tobacco products had a negative impact on Altria's results, and the full impact of the acquisition of SABMiller by Anheuser-Busch InBev (BUD 0.15%) hasn't yet made it into Altria's results. Going forward, CEO Marty Barrington was still optimistic that Altria would hit its long-term growth projections of about 7.5% to 9.5% in adjusted earnings gains for the full year, and more growth should emerge in the second half of 2017.

For Reynolds American, results similar to those of Altria in its most recent quarter revealed how various trends are being felt industrywide. Yet most investors are instead focusing on the coming acquisition of Reynolds by British American Tobacco (BTI 1.39%). In late May, Reynolds announced that CEO Debra Crew will stay with Reynolds following the merger, which the companies currently expect to happen in the third quarter of 2017. CFO Andrew Gilchrist will resign, but most other executives will stay on board. For shareholders, a combination of $29.44 in cash represents almost half the value that they'll receive in the merger, but they'll also receive 0.526 shares of British American for every Reynolds share they own. That will give investors a stake in what happens with BAT and Reynolds after the merger, and it will require the combined company to make good on promises to make the most of innovation in the reduced-risk product space to build up a competitive advantage over Altria.

With the outstanding merger having pushed up Reynolds American's valuations, Altria looks like a slightly better value for investors right now. How the two stocks will fare after Reynolds and BAT merge is anyone's guess, however, and the two tobacco giants are in for a big fight in the near future.

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

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