Tobacco stocks are a longtime favorite of dividend investors, and sister companies Altria Group (MO 1.14%) and Philip Morris International (PM 0.31%) dominate the industry.
Since Altria spun off Philip Morris more than a decade ago, the two companies have taken different approaches to ready their companies for a future where cigarettes aren't their main revenue source. Both companies have their advantages, but one is likely to outperform the other. Here is how these two dividend stalwarts stack up.
Both companies put cash in your pockets
Altria sells tobacco and nicotine products in the United States, headlined by the Marlboro brand of cigarettes. Philip Morris also sells Marlboro, but exclusively in non-U.S. markets. Marlboro is the leading cigarette brand in America, and while it has more competition internationally, it contributed 37% of Philip Morris' shipment volumes in 2020.
Warren Buffett (who doesn't own or advocate owning either stock) once described cigarettes as something that cost a penny to make, sell for a dollar, and are addictive. In other words, Altria and Philip Morris enjoy substantial profit margins, routinely getting $0.39 and $0.35, respectively, of free cash flow from each revenue dollar.
The addictive nature of nicotine has made tobacco companies resilient through up and down markets and economies. Altria is a Dividend King with 52 consecutive dividend raises. Meanwhile, Philip Morris has raised its payout yearly as a public company.
You can see how each dividend compares in the chart below:
MO Dividend Yield data by YCharts
Altria's 8.2% dividend yield is excellent, but Philip Morris isn't slouching either. You can do great with Altria for income, but the dividend payout ratio for Philip Morris is notably lower, which leaves more room for the payout's long-term growth.
Going beyond smoking
The public has known that cigarettes are a health hazard since the Surgeon General's first public warning in 1964 (and many knew it even before then). The dividends have flowed for decades despite this, but the smoking rate is steadily decreasing, and tobacco companies ship fewer cigarettes each year.
There is a common goal for Altria and Philip Morris to build a sustainable business beyond cigarettes, but they've taken two different paths to get there. Philip Morris has spent nearly the past decade growing its IQOS brand, a heat-not-burn tobacco device that produces inhalable vapor with fewer toxins than regular cigarette smoke. IQOS now contributes 30% of the company's total revenue.
Altria's tried buying assets to diversify beyond smokeable products but hasn't had much luck. It has majority ownership of on! nicotine pouches, which have steadily grown in recent years. Altria's 2018 $12.8 billion investment into electronic cigarette maker Juul has already become one of the biggest mistakes in corporate history. A recent Food and Drug Administration (FDA) ruling has prohibited the sale of Juul in the States, which all but makes Altria's investment worthless.
Altria and Philip Morris still rely heavily on smokeable products, and they have a long way to go before they can financially stand on their own without tobacco sales. Still, Altria seemingly has more questions about its long-term future than Philip Morris at the moment.
Looking at valuation
Wall Street has placed very different valuations on Altria and Philip Morris for as similar as they are. Philip Morris has a forward price-to-earnings ratio (P/E) of almost 17.6, while Altria's is just 9.1, nearly 50% lower. Naturally, investors want to know if this is justified. It's a tricky question to answer; the companies have similar growth expectations. Analysts believe the companies will grow earnings per share (EPS) by annual averages of 4% (Altria) and 4.5% (Philip Morris) over the next three to five years.
Altria is in Wall Street's dog house for its mistakes in the Juul acquisition. Understandably, spending $12.8 billion on something and declaring it nearly worthless less than four years later is not ideal. But the stock's been punished and then some; meanwhile, Altria's legacy business continues carrying water for shareholders.
Which stock is worth further consideration?
If you're looking for the total package, where both dividends and share price are important to you, Philip Morris International has a slight edge. The company's IQOS brand was built within Philip Morris and has enormous potential.
Altria's colossal dividend and dirt cheap valuation could mean it is the better stock in the short term. But there are a lot of questions about how long Altria's cigarette business can drive growth and where future long-term revenue will come from. This investor would rather own Philip Morris for that reason.
