Back in 2008, tobacco giant Altria Group (MO 0.31%) spun off its overseas business as Philip Morris International (PM 0.22%). At the time, Altria planned to focus on streamlining, cutting costs, and handling its tobacco-related lawsuits in the U.S. PMI was set loose to expand overseas into markets with higher smoking rates and fewer regulations.
Since that separation, Altria's and PMI's stocks have generated total returns of about 370% and 240%, respectively, after factoring in their reinvested dividends. Both stocks also outperformed the S&P 500 this year as the bear market drove investors toward safer, cheaper, and higher-yielding stocks.
Image source: Getty Images.
Should investors consider buying either of these tobacco stocks as rising interest rates continue to punish higher-growth investments? Let's review their core businesses, growth rates, dividends, and valuations to decide.
The similarities and differences
Altria and PMI both generate most of their revenue from their flagship Marlboro cigarettes. Both companies are struggling with declining smoking rates, tighter regulations, and stiff competition from smaller brands. Altria and PMI are both countering that slowdown by raising prices, cutting costs, and buying back more shares. Those strategies can't be sustained forever, but they've helped both companies consistently grow their earnings per share even as their revenue growth cooled.
The key difference is that Altria generates all of its revenue in the U.S., while PMI still generates most of its revenue overseas. Therefore, Altria doesn't face any currency headwinds, but PMI's growth has been significantly throttled by the rising dollar over the past year. PMI's sales in Russia and Ukraine have also been affected by Russia's invasion of Ukraine.
To escape the secular decline of the cigarette market, Altria and PMI aggressively launched other types of tobacco and nicotine products. Altria also sells cigars, snus, nicotine pouches, and e-cigarettes. PMI sells IQOS heated tobacco products, which heat up sticks of nicotine instead of burning them, as well as IQOS e-vapor products, snus, and nicotine pouches.
Altria previously partnered with PMI to sell its IQOS devices in the U.S., but that agreement will expire in April 2024 and allow PMI to directly sell those products in the U.S. PMI will pay $2.7 billion to Altria ($1 billion of which was already paid) to close out that partnership, and Altria plans to use those proceeds to develop other smoke-free products. Altria will also terminate a non-compete clause against Juul after significantly reducing its stake in the struggling e-cigarette maker over the past year.
Comparing the key growth rates
In 2020, Altria's revenue (excluding excise taxes) rose 5% to $20.8 billion as its adjusted EPS increased 6%. Its total retail share of the cigarette market slipped 70 basis points to 49.2%, and its adjusted shipments of cigarettes fell 2%. It largely offset that slowdown with price hikes.
In 2021, Altria's revenue (excluding excise taxes) grew 1% to $21.1 billion as adjusted EPS rose 6%. Its retail share of the cigarette market shrank to 48.8%, while adjusted cigarette shipments fell another 6%. For 2022, analysts expect its revenue to decline 1% as its adjusted EPS grows 5%.
Altria's stock trades at just nine times forward earnings, and it pays a hefty forward dividend yield of 8.5%. That payout is sustainable: It spent 81% of its free cash flow (FCF) on those dividends over the past 12 months.
In 2020, PMI's revenue declined 4% (and fell 2% on an organic basis) to $28.7 billion, while its adjusted EPS stayed nearly flat. Its total shipments fell 8% for the year, as lower shipments of traditional cigarettes offset double-digit growth in IQOS shipments.
In 2021, PMI's revenue rose 9% (and grew 8% organically) to $31.4 billion as its adjusted EPS increased 18%. PMI's total shipments climbed 2% as higher heated tobacco shipments offset declining cigarette shipments. But for 2022, analysts expect its revenue to drop 4% (mainly due to the Ukraine invasion and its impact across Europe) and for the company's adjusted EPS to decline 8% as the IQOS segment grapples with higher costs and supply chain disruptions.
PMI's stock trades at 14 times forward earnings and pays a forward yield of 5.9%. That yield is also easily sustainable: PMI spent just 66% of its FCF on those dividends over the past 12 months.
Altria and PMI are both expected to return to growth in 2023 and 2024, as Altria starts launching more of its own smokeless devices and PMI ramps up its IQOS sales in the U.S. Those strategies will enable both companies to gradually reduce their long-term dependence on traditional cigarettes.
The better buy: Altria
I once considered PMI to be a better buy than Altria because it generated stronger growth overseas. But right now, Altria's lower valuation, higher yield, and zero exposure to overseas conflicts and currency headwinds make it a much more promising bear market buy than PMI.
