Philip Morris vs Altria: Which One Should You Choose for Income and Growth?

Philip Morris has international exposure, but Altria has a trick up its sleeve which makes it look more attractive as a long-term investment than its larger peer.

Rupert Hargreaves
Rupert Hargreaves
Apr 28, 2014 at 2:13PM
Consumer Goods

Philip Morris International (NYSE:PM) and Altria (NYSE:MO) are one and the same. In fact, the two companies have only been separated for a few years, and Altria counts the Philip Morris USA brand as one of its divisions.

However, many investors ask which company is better-placed for growth and offers a more reliable, income stream. This is a difficult question to answer, as Philip Morris and Altria have many similar qualities.

National vs. International
Both Altria and Philip Morris are effectively cigarette companies; I say "effectively" because around 20% of Altria's operating income comes from its investments in SABMiller, the Ste. Michelle wine estates, and smokeless tobacco products.

Altria and Philip Morris both own the Marlboro cigarette brand, one of the most iconic brands of the last century, and both companies have dominant market shares in their respective markets. In particular, Altria's market share is around 50% of the US cigarette market and Philip Morris holds nearly 30% of the global cigarette market, excluding that of the People's Republic of China.

What's more, both Altria and Philip Morris are struggling to drive their sales higher as the number of smokers worldwide continues to decline. However, in this respect, Philip Morris is in a better position than Altria. The number of smokers within Asian countries, particularly in China where Philip Morris sells a limited number of cigarettes under license, is still growing.

Still, the falling number of smokers within the Western world is mitigating most of the growth coming from Asia. Furthermore, Philip Morris is facing pressures from rising excise taxes that continue to pressure the company's bottom line.

I'll let the figures explain.

The numbers
For example, during 2013 Philip Morris shipped 880.2 billion cigarettes, a 5.1% drop year-over-year. Net full-year revenue ticked higher by 3.4% to just over $80 billion. However, excise taxes on goods sold increased by 6.1%, which resulted in a 1% drop in gross profit and a 3.3% decline in net earnings.

On the other hand, Altria benefited from a more relaxed tax regime within the United States. Specifically, for the full year of 2013 Altria's revenue actually fell, but a decline in excise taxes resulted in a 13.2% jump in operating income from smokeable products -- not bad.

At a guess, with the governments of Australia, the UK, the Eurozone, and the Philippines all increasing their excise taxes to try to stamp out smoking, excise taxes will continue to take increasingly large chunks out of the company's profits and will crimp its profitability.

A trick up its sleeve
While Philip Morris is grappling with falling income due to rising taxes and declining cigarette sales numbers, Altria is benefiting from a rise in the amount of beer sold around the world.

Many investors fail to realize that Altria's holding in SAB is actually one of the fastest-growing parts of the group. Since 2008 Altria's annual income from its share of SAB has jumped from $467 million to $991 million in 2013; this is a compound annual growth rate of 16.2%. 

In comparison, Altria's income from smokeable products has grown at a compound annual growth rate of 4.2%. If Altria's income from SAB continues to expand by 16.2% per year, its income from the holding will begin to rival that from cigarettes within a decade.

What's more, considering that Altria initially invested $6.5 billion in SAB, an income of $991 million for fiscal 2013 indicates an annualized return on investment of 15.2% -- not bad at all.

So which one should I choose?
In the past, Philip Morris has been the company of choice for investors who seek growth and income from the tobacco sector. However, at present Philip Morris' dividend yield sits below Altria's at 4.5% in comparison with Altria's 5.1%. 

When factoring in both Altria's higher yield and its exposure to the fast-growing beer and wine markets, it would seem as if Altria is now investors' best choice for income and growth.