British American Tobacco (BTI -0.26%) and Philip Morris (PM -0.16%) are the two largest, publicly traded cigarette companies in the world but they have slightly different growth plans.
On one hand, British American is driving growth through margin expansion and volume growth. On the other hand, Philip Morris is expanding into the distribution part of the market and buying back its stock to offset falling sales volumes of its key Marlboro brand of cigarettes. So which company is the best bet for growth?
Hard choices
Choosing between British American and Philip Morris is not an easy task. Both companies are capturing greater shares of the global cigarette market and both are driving their earnings higher. However, one difference becomes apparent between them if you do your homework.
You see, both Philip Morris and British American show expanding earnings, but British American's earnings appear to be expanding organically while Philip Morris is relying on stock buybacks to boost its earnings per share.
For example, based on 2013 numbers British American's overall cigarette volumes declined 2.7% for a decline less steep than that of the wider industry, which shrank by 3%. Philip Morris reported an overall, unadjusted 5.1% decline in the volume of cigarettes sold .
What's more, at constant exchange rates, during 2013 British American's revenue and adjusted operating profit expanded 4% and 7% year-on-year, respectively. Philip Morris' revenue and adjusted operating profit for the period, excluding currency, ticked up 1.9% and 1.9%, respectively.
Further, during 2013 British American improved its operating profit margin by 100 basis points during the period, while Philip Morris' adjusted margin for the period only widened by 60 basis points .
Still, one area where Philip Morris did outperform British American was earnings-per-share growth. Philip Morris' EPS expanded by 8.3% during 2013, but British American only managed basic EPS growth of 5%. How did Philip Morris manage this growth? The company spent $6 billion to buy back 67.2 million shares during the period, while British American only spent £1.5 billion to repurchase 44 million shares. So it quickly becomes apparent that Philip Morris is driving growth through buybacks .
It would appear as if British American is the better choice when it comes to growth as the company is expanding its income and earnings organically, without the need for excessive buyback programs. Actually, in the case of British American, it would appear that the buybacks are a bonus for investors.
Unfortunately, when it comes down to the question of income (as it always does with tobacco companies) Philip Morris pulls ahead. Specifically, Philip Morris' buybacks mean that it is returning more cash to investors on a per-share basis than British American is.
Nevertheless, British American does offer the more impressive dividend yield, which currently stands at 5.6% compared to Philip Morris' current 4.4% yield, but how much do the buybacks add?
Well, Philip Morris returned $5.7 billion to investors during 2013 through buybacks, which is equivalent to around $3.52 per share. In addition to the $3.58 per share dividend paid out during 2013, this works out to an equivalent cash return per share of $7.10, a yield of 8.2% at current levels. In comparison, British American returned a total of $6.9 billion to investors during 2013 for a total of $3.60 per share, (approximately $7.20 per ADR ) which is equivalent to a yield of 6.1 %.
One thing to note, however, is that Philip Morris is planning to reduce its share buybacks during the next few years, as the company tries to get its debt burden under control.
Foolish summary
So in overall terms British American comes out on top as the best investment for growth. The company is growing its earnings without having to rely on buybacks and as Philip Morris' buyback program slows, British American will offer investors the larger yield.
