Better Dividend Stock: Altria vs. Target

Altria (MO 1.45%) and Target (TGT -0.54%) both have reputations as safe dividend stocks for conservative investors. Altria, the largest tobacco company in the U.S., has raised its dividend every year since it spun off its international unit as Philip Morris International (PMI) in 2008. Target is a Dividend King that has raised its annual payout for 51 straight years.

Altria pays a forward yield of 8.1% and trades at just 9 times forward earnings. Target pays a lower forward yield of 2.7% and trades at 19 times forward earnings. Based on those numbers alone, some value-seeking income investors might gravitate toward Altria instead of Target.

Image source: Getty Images.

But over the past five years, Altria's stock produced an anemic total return of less than 4% after factoring in its reinvested dividends. Target generated a total return of over 150% and beat the S&P 500's total return of roughly 56%. Let's see why Target outperformed Altria -- and if it's still the better choice for investors who want a good blend of dividends and growth.

Altria faces existential challenges

Altria's core business, which generates most of its revenue from its flagship Marlboro cigarettes, has been shrinking over the past few decades as the percentage of smokers in the U.S. gradually declined. Smaller competitors also chipped away at its market share, while newer products like e-cigarettes and heated tobacco sticks disrupted the broader cigarette market. Rising excise taxes also made cigarettes a lot less appealing.

To counter those headwinds, Altria raised its prices to offset its slowing shipments. It also reined in its spending, bought back more shares to boost its earnings per share, and raised its dividends. It also expanded its portfolio beyond cigarettes with cigars, snus, nicotine pouches, and e-cigarettes. Unfortunately, most investors simply weren't impressed by Altria's stagnant growth and market share losses over the past several years.

Data source: Altria. *Adjusted for trade inventory movements and other factors.

Altria's attempts to expand into higher-growth markets were also clumsy. It invested $12.8 billion in the domestic e-cigarette leader Juul in 2018, but that stake withered after the Food and Drug Administration banned Juul's products last year. It sold its entire stake in Juul this March and bought its smaller rival NJOY for $2.75 billion in cash instead.

Altria also partnered with PMI to sell its iQOS heated tobacco products in the U.S., but PMI will reclaim those rights when that partnership expires next month. Altria plans to replace that deal with a new joint venture with Japan Tobacco to sell its Ploom heated tobacco products, but that partnership won't move the needle anytime soon. 

Altria expects its adjusted EPS to rise 3%-6% this year, but its revenue growth could remain sluggish as its cigarette shipments continue to decline and its other smaller non-cigarette businesses fail to offset that pressure. 

Target faces a tough cyclical decline

Target doesn't face any existential challenges like Altria. Instead, it survived the retail apocalypse and fierce competition from Amazon and other mass retailers by aggressively expanding its e-commerce ecosystem, leveraging its network of brick-and-mortar stores to fulfill its online orders, renovating its stores, and expanding its private label brands.

As a result, Target's growth accelerated throughout the pandemic as more shoppers stocked up on groceries and household products. Stimulus-induced spending generated additional tailwinds. However, its growth decelerated significantly in fiscal 2022 (ended in January 2023) as those tailwinds dissipated and were succeeded by inflationary tailwinds.

Data source: Target.

As Target's growth cooled off in that tough market, it relied more heavily on markdowns to boost its comparable store sales and reduce its inventories. But those discounts compressed its gross margins and crushed its profits.

That situation might seem bleak, but Target finally reduced its inventories by the end of fiscal 2022. In fiscal 2023, it expects its comps to come in between a "low-single-digit decline to a low-single-digit increase" (depending on the macro environment) as its adjusted EPS increases by 29% to 45%. It also expects its operating margin -- which had declined from 8.4% in fiscal 2021 to 3.5% in fiscal 2022 -- to return to its pre-pandemic level of 6% within the next three years.

Therefore, Target will likely survive the current downturn and remain one of the few brick-and-mortar retailers that can still compete with Amazon and Walmart in the cutthroat retail market.

The obvious winner: Target

Target trades at a higher multiple than Altria and it pays a lower dividend, but it's the better investment because it has a brighter future. I'm confident that Target can generate stable gains for its investors over the next 10 years, but I can't say the same for Altria -- which is gradually sinking as it treads water with price hikes, buybacks, and messy investments.