Verizon (NYSE:VZ), America's top wireless carrier, and Altria (NYSE:MO), the country's top tobacco company, are generally considered stable blue chip dividend stocks with wide moats. Yet the telco has generated weaker returns than the tobacco maker over the past five years. Shares of Verizon stayed nearly flat, while shares of Altria surged nearly 60%.

Looking ahead, rising interest rates could hurt both stocks as bonds become more attractive for income investments. Let's take a closer look at these two S&P 500 components and see which stock is better poised to weather the coming storm.

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Comparing Verizon's and Altria's businesses

Verizon generates most of its revenues from its wireless business. Verizon Wireless was originally a joint venture between Verizon Communications and Vodafone, but Verizon bought out Vodafone's stake in a $130 billion deal in 2014.

Verizon continued to evolve, and accumulate more debt, with its $4.4 billion takeover of AOL in 2015 and $4.5 billion purchase of Yahoo!'s internet businesses in 2017. To reduce its long-term debt, which dipped by less than 1% annually to $112.8 billion last quarter, it sold non-core assets like its data centers, cloud businesses, and landline assets.

Verizon's goal was to offset its gradual slowdown in smartphone subscribers in the US (which was caused by tougher competition and market saturation) by expanding its digital ecosystem with streaming content and internet ads. AT&T recently acquired Time Warner and advertising exchange AppNexus for similar reasons.

Tobacco giant Philip Morris, the maker of Marlboro cigarettes, rebranded itself as Altria in 2003. It divested its stake in Kraft Foods in 2007, then spun off its overseas operations as Philip Morris International in 2008. Altria then diversified its portfolio by acquiring several top cigar brands and UST, which gave it the Copenhagen and Skoal snuff brands and Ste. Michelle Wine Estates.

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Altria also acquired a stake in brewery SABMiller, which was sold to Anheuser-Busch InBev in 2016. To counter waning demand for traditional cigarettes, Altria launched MarkTen e-cigarettes, and partnered with Philip Morris International to launch iQOS devices -- which use tobacco "sticks" that they heat, rather than burn -- across the United States. Altria still generates most of its revenues from cigarettes, but its "smokeless" products now account for over 10% of its top line.

Altria uses price hikes, cost-cutting measures, and buybacks to boost its earnings even as its sales growth remains stagnant. This strategy can't last forever, but it could help Altria tread water as its non-cigarette products gain more ground.

Growth forecasts, valuations, and dividends

Verizon and Altria both generate glacial sales growth but decent earnings growth. Wall Street expects Verizon's revenue to rise 3% this year, and for its earnings to grow 23%, mainly due to tax reform benefits.

Once those benefits wear off, Verizon's earnings are expected to rise just 2% next year. The costs of integrating Oath (which includes AOL and Yahoo's internet properties), the expansion of its ecosystem, and ongoing price wars with AT&T and T-Mobile US are also expected to weigh down margins. Nonetheless, Verizon's stock still looks cheap at 11 times forward earnings.

Altria got a big earnings boost from InBev's buyout of SABMiller last year. But for the current year, analysts expect its revenue to rise less than 1% as earnings climb 18% thanks to lower tax rates and ongoing buybacks. Its sales are expected to rise 2% next year, with 9% earnings growth.

Altria faces some tough near-term headwinds. The Food and Drug Administration is drafting new rules to reduce nicotine content in cigarettes and regulate sales of flavored cigarettes, e-cigarettes, and cigars. Adult smoking rates in the US hit a historic low in 2017, and British American Tobacco's buyout of Reynolds American, Altria's top rival, could threaten its top brands, including Marlboro. However, Altria's stock also looks cheap at 14 times forward earnings.

Verizon pays a forward yield of 4.7%, which is slightly lower than Altria's 4.8% yield. Verizon spent 31% of its earnings on that dividend over the past 12 months, and it's hiked it annually for 11 straight years. Altria spent 46% of its earnings on its dividend over the past 12 months, and it's raised it annually for nine straight years.

The winner: Verizon

I think Altria is a decent dividend stock, but Verizon faces fewer direct headwinds, its stock trades at a lower multiple, and it has a lower payout ratio. Both stocks could slip as interest rates rise, but Verizon looks like the safer play.

 

Leo Sun owns shares of AT&T. The Motley Fool owns shares of and recommends Anheuser-Busch InBev NV. The Motley Fool recommends T-Mobile US. The Motley Fool has a disclosure policy.