On the surface, it would seem Coca-Cola (KO 0.68%) and Altria (MO 0.49%)don't have much in common. But appearances can be deceptive. Both companies manage classic American brands and both sell products that have come under varying levels of public ire for their negative health effects. Despite the headwinds, both companies operate well and keep chugging along. Perhaps surprisingly, both stocks trade at valuations of over 20 times earnings.
Both Coke and Altria may be thought of as "sin stocks," a surprisingly lucrative class of investment as many consumers keep using their products regardless of economic conditions and even though they know these products have adverse health effects. Both are also popular picks with income investors because of their status as Dividend Kings (stocks that have increased their dividend payouts each year for 50 consecutive years or more).
So which is a better buy right now, Coca-Cola or Altria?
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Clash of the Dividend Kings
If an income investor's primary criterion for investing in a company is its dividend payout, Altria wins hands down. As mentioned, both companies trade at relatively high P/E multiples for value stocks, and that's despite exhibiting negligible or even declining revenue growth over the last five years. But Altria pays out a dividend that yields 7.3% at current prices, even after share prices gained 9.8% over the past year. Coca-Cola has a solid 2.6% dividend yield, but it pales in comparison to what Altria is offering.
Coca-Cola deserves credit for the steadfast commitment to its dividend and the longevity with which it has consistently increased it. This Dividend King just increased its payout for the 60th straight year in February. Altria is also a Dividend King with a 50-plus-year streak of dividend increases of its own, so both companies deserve credit for their consistent commitment to shareholder returns. However, at the far superior current yield, right now, Altria is the winner here.
Beyond dividends, share repurchases are another way that companies return value to shareholders. Altria recently expanded its existing $2 billion share-buyback program to $3.5 billion, which equates to about 3.85% of the current market cap. On the other hand, Coca-Cola has not been active in buying back shares over the past year, although it recently announced its intention to resume repurchases in 2022. Still, Altria has been repurchasing shares more actively, and the size of its plan dwarfs Coca-Cola's planned $500 million, so Altria has the edge in this department as well.
Playing defense
These are both strong consumer staples companies that have held up well and should continue to be safe havens in an uneasy market environment where many richly valued stocks are selling off amid fears of inflation, economic downturn, and escalating geopolitical tensions. Even in the event of a serious downturn, the majority of consumers who currently smoke cigarettes will keep buying them, and people who regularly enjoy the dozens of drink brands that Coca-Cola markets will largely continue purchasing these products regularly as well.
And the winner is...
The two companies differ in terms of valuation on a price-to-earnings (P/E) basis. Coke trades at 26 times earnings, and Altria trades at 21 times earnings. However, where they really differ is when it comes to next year's consensus earnings estimates. Altria is much cheaper at 10 times forward earnings versus Coke at 23 times forward earnings, so Altria is a slightly better value now and much cheaper going forward.
I view these as fairly similar types of companies and investments despite the different types of products. Both are stable consumer staple giants that should hold up relatively well versus the current market uncertainty. Both are consistent dividend payers and are solid choices for defensive investments. Considering its superior dividend yield, share buybacks, and more attractive valuation, Altria is the better investment going forward.
