When you look at the global tobacco industry, Philip Morris International (NYSE:PM) and British American Tobacco (NYSE:BTI) are among the most influential companies in the business. Philip Morris focuses exclusively on the international tobacco market, while British American Tobacco recently acquired U.S. tobacco giant Reynolds American to become a truly global player in tobacco.

The pace of change in the tobacco industry is faster than ever, and both Philip Morris and BAT have had to pivot in order to avoid the many potential pitfalls involved in this business. With both stocks having seen weakness lately, some value investors smell opportunity but want to make sure they make the smarter pick between these two companies. With that in mind, here's a closer look at Philip Morris International and British American Tobacco that can shed some light on which one looks more promising.

Two hands holding an iQOS device over a white table.

Image source: Philip Morris.

Valuation and stock performance

Both Philip Morris and BAT have posted huge losses for shareholders lately. Since June 2017, Philip Morris stock is down 33%, and BAT's 29% drop is only a little bit less extreme.

Comparing the two tobacco stocks based on valuation is a little challenging right now, largely because of one-time elements that have distorted trailing earnings recently. For instance, Philip Morris has a trailing multiple of more than 22 right now, but its forward multiple is more reasonable at 16. Meanwhile, BAT's trailing multiple is ridiculously low at just two times earnings due to a huge one-time earnings boost, but again a forward multiple of 13 is more realistic. Based on slightly better stock performance and a cheaper valuation based on future earnings projections, British American gets the nod here.

Dividends

Both Philip Morris International and British American Tobacco have been generous with shareholders in making dividend payments. Philip Morris wins on the current yield front with a 5.3% dividend yield, but BAT's 4.7% figure isn't too far behind.

Both of the tobacco giants have also seen some pressure on dividends lately, although shareholders have still benefited to a large extent. For Philip Morris, what had been double-digit percentage dividend growth year after year has suddenly slowed dramatically, with the company making relatively small increases over the past few years. BAT, meanwhile, has adopted a quarterly dividend schedule, which is fairly unusual for U.K.-based companies that typically prefer unequal semi-annual payments. BAT's payments in dollar terms have also dipped in recent years, largely reflecting the Reynolds American purchase as well as the plunge in the British pound due to the Brexit decision. For now, Philip Morris' higher yield and more reliable growth gives it an advantage on the dividend front.

Growth prospects and risks

Big Tobacco is going through huge shifts, and Philip Morris and BAT have both had to respond aggressively. For Philip Morris, moving beyond traditional cigarettes has become a long-term strategic goal, and the company sees alternative reduced-risk products like its iQOS heated tobacco system to be instrumental to its long-term success. Yet after an extremely promising start, iQOS sales were unexpectedly weak during the first quarter, and that prompted a plunge in the share price following the announcement. Moreover, Philip Morris has hoped to gain approval from the U.S. Food and Drug Administration to sell iQOS in the U.S. through its distribution partner, but thus far, the regulator hasn't been forthcoming in granting its permission. Add to that an ongoing decline in regular cigarette consumption and an increasingly hostile regulatory environment worldwide, and it's easy to see why Philip Morris has faced such difficulties lately.

British American has had to deal with challenges of its own. Earlier this year, the company had to recall its Vibe electronic cigarettes, as several users reported battery overheating problems that the company judged could result in the risk of fire. The recall involved 2.6 million units, further harming BAT's competitive status in the e-cigarette arena in the U.S. market as competitors like JUUL Labs have built up a commanding presence domestically. More broadly, BAT has seen growth from its takeover of Reynolds American, but it's also dealing with the challenges of a broader secular decline in cigarette demand throughout many regions of the world market.

Giving it a pass

At this point, neither Philip Morris nor BAT looks like a sure thing for investors. Philip Morris needs to get iQOS back on track, while BAT would benefit from broader alternative growth trends more generally. That'll take some doing, and until that happens, investors are smarter watching both of these stocks from the sidelines.

Dan Caplinger 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.