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Better Dividend Stock: Altria Group Inc. or Philip Morris International Inc.?

By Leo Sun – Apr 6, 2015 at 6:00PM

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Which tobacco stock is the better long-term play for income investors?

Altria (MO -2.27%) and Philip Morris International (PM -2.18%) represent the two halves of the Philip Morris tobacco empire. Back in 2008, Altria spun off its international operations as PMI. PMI was intended to become a higher-growth play focused on overseas markets, while Altria streamlined its U.S. business to deal with declining smoking rates.

In the past, I've discussed Altria and PMI's core businesses and fundamentals. Today, let's take a closer look at Altria and PMI's dividends to decide which is the better stock for long-term income investors.

Philip Morris' flagship Marlboro brand. Source: Pixabay.

Yield, dividend growth, and payout ratios
PMI has a yield of 5.2%, compared to 4.1% for Altria. Yet this was mainly caused by diverging prices -- over the past 12 months, PMI's stock slipped 7% while Altria's rallied 36%.

Both PMI and Altria have consistently raised their dividends annually since the spin-off. On an annual basis, PMI's dividend has risen 56% over the past five years, compared to 37% for Altria. PMI also raised its annual dividend by double digits for four of the past five years, compared to just one double-digit boost for Altria in 2010.



















Source: Company press releases.

Meanwhile, Altria has a lower payout ratio than PMI. Over the past 12 months, Altria paid out 77% of its earnings as dividends, compared to 81% for PMI. PMI might seem more "generous" in that regard, but Altria's slightly lower payout ratio also gives it slightly more room to raise its dividend.

Earnings growth potential
For a company to grow its dividend, it needs dependable bottom line growth. Last year, Altria's diluted EPS rose 13.3% year-over-year. This year, it expects its adjusted earnings -- which exclude various impairment, acquisition, health litigation, and other charges -- to rise 7% to 9% annually.

PMI's diluted 2014 earnings fell 9.5% year-over-year, and it expects earnings to slip another 8% to 10% in 2015. Excluding currency impacts, PMI expects adjusted earnings to rise 8% to 10%.

PMI's discrepancy between reported and adjusted earnings highlights its biggest weakness: the U.S. dollar. Since all of PMI's sales come from overseas as it reports earnings in U.S. dollars, its bottom line remains under pressure as long as the dollar is strong. Since Altria's tobacco business is based completely in the U.S., it doesn't have to worry about unfavorable exchange rates.

Top line growth potential
Altria and PMI both face a similar problem of declining smoking rates. Both companies' top lines are weighed down by slowing cigarette shipments. In 2014, Altria's cigarette shipments fell 3% year-over-year, as PMI's declined 2.8%. Altria's full-year revenues remained flat year-over-year, while PMI's fell 4.6%.

Altria offset declining shipment volumes by hiking prices across the U.S. However, PMI failed to do the same overseas in Asia and Latin America, where revenue respectively fell 16.9% and 2.3% annually. PMI blamed those declines on Marlboro's loss of market share to other brands across Asia, particularly in Japan, and flat sales growth in Latin America.

Altria also sells smokeless products (chewing tobacco, e-cigarettes) and wine, which together accounted for 10% of its top line in 2014. It also holds a major stake in SABMiller. Meanwhile, PMI is experimenting with e-cigarettes in certain markets, but its smokeless products don't account for a meaningful percentage of its revenues yet.

The winner: Altria
PMI might have a better yield and a history of bigger dividend boosts, but its top and bottom line problems are too significant to ignore. Its top line will keep being chipped away by cheaper regional brands, and its bottom line will be "smoked" by a strong dollar. Unless the dollar weakens -- which is unlikely in the near term due to QE plans in Japan and Europe -- PMI's ability to grow its dividend will remain under pressure.

Altria is a more expensive stock -- it trades at 20 times trailing earnings, compared to PMI's P/E of 16. However, Altria is also based in a single market with fewer moving parts, which stabilizes its top and bottom line growth. In my opinion, that stability makes Altria a better long-term dividend play than Philip Morris International.


Leo Sun owns shares of Altria Group,. The Motley Fool has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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