Altria (MO 1.33%) and Lorillard (LO +0.00%) are, respectively, the largest and smallest domestic publicly traded tobacco companies. However, they are two completely different companies.
On one hand, Lorillard, although the smaller of the two, has reported surging income over the past five or so years as the company's cigarette sales have expanded to buck the wider industry decline.
On the other hand, Altria's subsidiary Philip Morris USA owns the Marlboro cigarette brand, which has a market share of nearly 50% within the U.S., although volumes sold are declining. Furthermore, Altria owns other non-tobacco businesses, which will be key going forward as the number of smokers within the US declines.
So, if you had to choose between Lorillard and Altria, which one should you pick?
Growth or security
The main difference between Lorillard and Altria is diversification. For example, Altria, along with its tobacco business, owns a nearly 30% economic interest in SABMiller.
Since 2008 Altria's annual income from its share of SABMiller has jumped from $467 million to $991 million, as reported during 2013; that's 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%.
Altria's other alcohol interests include ownership of the Ste. Michelle wine company, which contributed $609 million to the company's sales in fiscal 2013.
These two business interests outside of the tobacco industry give Altria a certain amount of diversification, and for that reason the company appears to be a better long-term investment than Lorillard.
In addition, Altria dominates the U.S.' domestic cigarette market (with just under 50% market share) and produces numerous NRTs, or nicotine-replacement therapy products, such as the Verve chewable nicotine product and Denmark, a type of gum that contains tobacco.
On the other hand, Lorillard is almost a pure cigarette company--that is, apart from the company's e-cig division, which is now struggling to find growth.
Still, Lorillard's tobacco business is easily one of the world's best. Indeed, unlike many other tobacco giants, Lorillard's cigarette sales and market share of the cigarette market continue to expand.
Specifically, during the first quarter of this year Lorillard's domestic retail market share increased 0.3% from the year-ago period to 15.2%, its highest level ever and first full quarter over 15%. Additionally, Newport, Lorillard's leading brand of cigarettes, saw its domestic retail market share reach 13%, an increase of 0.4% from the first quarter of 2013.
According to Lorillard's management:
...Gains in Newport's domestic retail market share were primarily attributable to the continued strengthening of Newport Menthol in its core geographies, continued success in expansion markets and the volume impact resulting from the introductions of Newport Smooth Select and Newport Non-Menthol Gold in 2013...
Of course, like its peers, Lorillard is slowly increasing the price of its cigarettes. As Lorillard's peers, like Altria, are increasing prices to offset falling sales volumes, Lorillard is increasing prices to keep up with the rest of the industry, as volumes remain healthy.
As a result, during the past four years Lorillard's gross profit has jumped 29% and the company's gross margin has risen from 36% to 39% over the period. In comparison, Altria's gross profit, excluding the income from SABMiller, has only expanded 14%.
Having said all of that, it is unlikely that Lorillard will be immune to falling cigarette volumes forever and the company lacks the diversification of Altria. Lorillard does own the rapidly growing Blu e-cig brand but profits from this venture have evaporated and Altria is going to encroach on this space throughout the rest of this year.
Investor returns
While Altria may seem better positioned for long-term growth, consider shareholder returns. Tobacco companies are well known for their shareholder returns. and both Lorillard and Altria support hefty dividend payouts and are spending billions to buy back stock.
Actually, Lorillard's stock buyback program has been highly effective, and the company has repurchased around 20% of its outstanding stock from year-end 2010 to year-end 2013. That's a nearly 7% boost to annual earnings per share from buybacks.
However, what do the numbers say?
Well, looking at the 2013 numbers, Lorillard returned a total of $1.6 billion to investors through both buybacks and dividends. Based on the number of shares in issue at year-end, this works out to around $4.30 per share, which is equal to a yield of 7.3% at present levels.
Meanwhile, Altria returned a total of $4.2 billion to investors and this comes out to around $2.10 per share, or a yield of 5.2%.
Foolish summary
So overall, it would appear that Altria is the more diversified play but Lorillard is returning more cash to investors.
Unfortunately, despite Lorillard's impressive investor returns, Altria is my pick as it should perform better over the long-term because of its diversification.
