Better Buy: Procter & Gamble vs. Altria

Procter & Gamble (PG 1.09%) and Altria (MO +1.32%) are both popular stocks for income investors. P&G pays a forward yield of 2.5%, and it's raised that payout annually for 63 straight years. Altria pays a forward yield of 6.8%, and it's hiked its payout every year since its spin-off of Philip Morris International (PM 1.82%) in 2008.

Altria's yield looks tempting, but its stock also stayed nearly flat this year as P&G rallied over 30%. Let's look back at why these two consumer staples stocks diverged over the past year, and which one is a better overall investment.

Image source: Getty Images.

A closer look at P&G

P&G owns a massive portfolio of brands, but just over 20 of them -- including Bounty, Crest, Head & Shoulders, Gillette, Pampers, Pringles, and Tide -- generate over $1 billion in annual sales. Its products are sold in over 180 countries.

P&G splits its business into five segments: beauty (20% of its revenue last quarter), grooming (9%), healthcare (12%), fabric & home care (33%), and baby, feminine, and family care products (26%). It downsized its beauty unit by selling its specialty beauty business to Coty (COTY 1.22%) three years ago.

P&G often struggles with three main headwinds: competition from cheaper generic and private label brands, a strong dollar gobbling up its overseas sales, and the weakness of certain product lines (like grooming products) offsetting the growth of its stronger brands.

Nonetheless, P&G's organic sales growth -- which excludes currency headwinds, acquisitions, and divestments -- remains stable. Its "core" EPS, which only accounts for continuing product lines and is buoyed by buybacks, is also growing at a healthy clip.

YOY = Year-over-year. Source: P&G quarterly reports.

For the full year, P&G expects both its reported and organic revenue to rise 3%-5% for the full year. It expects its core EPS to grow 5%-10%. Analysts expect its revenue and earnings to rise 4% and 9%, respectively, this year.

A closer look at Altria

Altria spun off its overseas tobacco business with Philip Morris International, so it currently generates all of its revenue from the U.S. market. This setup insulates it from currency headwinds and trade issues, but locks it out of overseas markets with higher smoking rates than the U.S.

Image source: Getty Images.

Altria's portfolio of "smokeable" products -- which include Marlboro cigarettes and Black & Mild cigars -- accounted for 86% of its revenue (excluding excise taxes) last quarter. 11% came from "smokeless" products like Copenhagen and Skoal snus, and the remaining sliver came from other products like wine.

Altria has struggled with declining smoking rates in the U.S. for years. Its default strategy is to raise prices to offset lower shipments, cut costs, and buy back shares to boost its EPS growth. It's still treading water with that strategy as its cigarette shipments decline.

YOY = Year-over-year. Source: Altria quarterly reports. *Net of excise taxes.

Altria realizes that this balancing act can't last forever. That's why it diversified its portfolio by selling PMI's iQOS devices (which heat tobacco sticks instead of burning them) in the U.S. and invested in the cannabis company Cronos and the e-cigarette maker Juul. However, Juul has attracted intense regulatory scrutiny over the past year, and Altria recently announced that it would take a $4.5 billion writedown on the besieged brand.

Altria expects its adjusted EPS to grow 5%-7% for the full year, even though it expects shipment volumes of cigarettes in the U.S. to decline 5%-6%. Analysts expect its revenue and earnings to grow 2% and 6%, respectively, next year.

Which stock is cheaper relative to its earnings growth?

Compared to Altria, P&G has a better diversified portfolio and stronger growth rates, and its core business isn't dependent on a shrinking market like adult smokers. However, its stock is more expensive at 23 times forward earnings, and it pays a lower dividend.

Over the past year, Altria's stock was battered by ongoing concerns about the cigarette industry's decline and its poorly timed investment in Juul. As a result, the stock now trades at just 11 times forward earnings and pays a yield of nearly 7%.

Altria initially looks like a better value play than P&G, but it's cheap because its cycle of raising prices, cutting costs, buying back shares, and desperately investing in new products can't last forever. P&G, on the other hand, can easily generate stable growth for decades to come -- which makes it a better overall investment than Altria.