There is no shortage of critics when it comes to tobacco and soft drinks. They are addictive and highly unhealthy products. The ramifications that tobacco bellwether Altria (MO -0.34%) and soft drink giant PepsiCo (PEP -0.75%) face are different, but with problematic consumption trends for their flagship products they have both diversified over the years to broaden their product lines. Which one will broaden and ideally brighten your portfolio?
Altria vs. PepsiCo may not seem like much of a fight. PepsiCo hit all-time highs last month, and while the recent sell-off finds the shares trading 18% down from their peak as of Thursday's close, it's held up relatively well in the market malaise. Altria has fallen 37% since its 52-week high established in the springtime of last year, and if we draw the starting line all the way back in the summer of 2017, when it established its all-time high, the stock has surrendered more than half of its value. Let's take a closer look at both companies to see which maker of controversial products is the better buy.
Lighting things up
Let's start with Altria, a company that has surprisingly managed to rattle off eight consecutive years of top-line growth in a seemingly bleak environment. Diversification has helped, as Altria has a broad range of smokeless tobacco and wine products in its arsenal. It also shook up its portfolio two years ago with minority stakes in vaping and cannabis leaders.
It's difficult to be upbeat about Altria's long-term prospects. It had to recently write down part of the value of its original $12.8 billion investment in Juul Labs when the e-cigarettes industry came under fire, and there isn't much of a light at the end of the smoking tunnel. It hasn't had to take a charge related to its 45% position in cannabis specialist Cronos Group (CRON -0.29%), but the stock has fallen sharply over the past year. Regulators are also tightening the already-strict marketing rules for cigarettes, and the warnings on packaging for Altria's Marlboro and other brands are about to get even more prominent.
Right now, the sell-off in Altria seems overdone. The coronavirus outbreak has resulted in the temporary shutdown of some of its operations, and even its CEO is currently on a medical leave after contracting COVID-19 himself. It's not an ideal situation for a company already facing industry headwinds, but the sell-off has pushed the yield up to 9.2% -- a beefy payout that's even more alluring since Altria has come through with 50 years of increased dividends. Despite relentless challenges, Altria's still finding ways to grow its business and crank out double-digit net profit margins in the process.
PepsiCo hasn't had to dabble in vaping and cannabis to branch out, but its product lines go far beyond its namesake soft drinks. PepsiCo has Quaker oatmeal and the Frito-Lay salty snack empire in its arsenal. Even when it comes to beverages, PepsiCo is a player in everything from bottled water to iced teas to orange juice. Earlier this month it announced that it would be acquiring energy drink giant Rockstar in a $3.85 billion deal, a transaction that makes sense since PepsiCo has served as the brand's distributor for more than a decade. In short, it knows exactly what it's getting into here.
PepsiCo's growth hasn't been as consistent as Altria's steady beats. Its revenue has declined slightly in three of the past eight years, but it is currently on a three-year winning streak. PepsiCo is also fanatical about returning money to shareholders, with on a 47-year run of dividend hikes. The current 3.2% yield is a little more than a third of Altria's payout, but it's more than reasonable for income investors in this low-interest-rate environment.
Over the long haul it's easy to bet on PepsiCo beating Altria. Despite the decline in consumer consumption for conventional soft drinks, PepsiCo is an industry leader in beverage lines trending the other way. However, given its low historic valuation and ridiculous yet surprisingly sustainable yield, I'd have to give Altria the nod as the better buy for the year ahead. If you don't have a fundamental issue with investing in tobacco stocks, it does seem to offer more near-term upside at this point.