Philip Morris International (NYSE:PM) investors are at least partly hoping to see the same trends that led its predecessor and former parent, Altria (NYSE:MO), to become one of the best investments over the past half-century:
As the international spinoff of Altria, Philip Morris International has faced serious foreign exchange pressure that's costing it billions in revenue dollars over the past couple of years. Furthermore, the trend that made Altria one of the best stocks to own for decades -- increasing use of tobacco products in the U.S. in the 20th century -- may not play out the same way internationally. For investors looking to benefit from long-term trends, there are real concerns about Philip Morris International.
We asked three contributors to give us a better long-term alternative to Philip Morris International, and they gave us three companies with strong brands, pricing power, and pretty big sustainable cash flows. Is one of these stocks a better pick for your income portfolio? Let's take a closer look.
Like Philip Morris, PepsiCo (NASDAQ:PEP) is a popular choice among investors on the hunt for a strong, dividend-paying stock to hold for the long term, and it's earned its status as a foundation stock in many portfolios
Even though soda industry sales are on a downward trend, PepsiCo is well diversified and stands as the largest food and beverage company in America. The company boasts a line of standout products across the snack and beverage industries, with 22 brands that do more than $1 billion in annual sales each.
Looking at the dividend profile, PepsiCo's payout currently yields about 3% -- comfortably above the roughly 2.2% yield on a 10-year U.S. Treasury bond. PepsiCo also has an impressive history of dividend growth -- raising its payout for 42 consecutive years and increasing its dividend by 170% over the past decade.
Over the past decade, PepsiCo stock has outperformed the market, and the business looks primed to continue driving steadily increasing income returns and capital appreciation. In its last fiscal year, the company generated more than $66 billion in revenue and free cash flow of $7.65 billion.
With a strong industry position, an attractive yield and history of returning value to shareholders, and healthy sales and cash generation, PepsiCo is a great dividend stock to own for the long haul.
For a dividend stock better than Philip Morris International, look no further than Altria. I believe Altria should be bought because it has a major advantage: foreign exchange.
Altria spun off Philip Morris International in 2008, to free it from the restraints of stricter U.S. regulations. But Altria's domestic focus is working in its favor right now. The rising U.S. dollar is hammering Philip Morris. Unfavorable currency fluctuations have shaved $2.2 billion off total revenue just over the first six months of the year, causing total revenue to decline 8% over the first two quarters. For the full year, the company expects currency alone to dent its earnings per share by $1.15.
By comparison, Altria is performing very well right now and sees no such challenges from foreign exchange. Altria produced 5% revenue growth last quarter, as well as 14% earnings growth year over year. It benefited from rising shares of both its flagship Marlboro cigarette brand and its Copenhagen and Skoal smokeless brands.
Because of their vastly different fundamental conditions, Altria's stock has handily outperformed Philip Morris' this year. Altria is up 5% year to date, while Philip Morris is down 5% in that time. And Altria recently increased its dividend by 9%. That makes it 49 dividend increases for Altria in the past 46 years. Altria has a great history of regular dividend raises, a trend I fully expect to continue for the foreseeable future. Because of the brutal foreign exchange market, Philip Morris may have trouble increasing its dividend by as much this year, if at all.
The best way to get consistent long-term dividend growth is to invest in companies with strong brands that consumers love, sustainable pricing power, and long-term trends in favor of those products. I can think of few companies that have those things better than Procter & Gamble (NYSE:PG)
Yes, the company has dealt with a number of challenges over the past few years. And now, it's facing some macroeconomic headwinds that are affecting returns, including currency exchange pressures, and weak economies in developing markets. But the company has already taken steps to restructure and refocus on its core business, starting the process off with a bang last year when it agreed to sell the Duracell battery business to Berkshire Hathaway in exchange for $4.7 billion in P&G stock.
Why buy now? In short, Procter & Gamble remains a well-run business that possesses some of the most recognizable consumer brands in the world, and many of these products are things people use every single day. This situation gives it pricing power that's relatively recession-proof, along with steady, predictable cash flows. While the global economy is hiccuping today, eventually things will stabilize, and Procter & Gamble will remain a major global consumer powerhouse.
Long-term investors are betting on the right side of long-term consumer trends with P&G. That may not be the case with Philip Morris.
Bob Ciura owns shares of Altria Group, and PepsiCo. Jason Hall owns shares of Berkshire Hathaway. Keith Noonan has no position in any stocks mentioned. The Motley Fool owns and recommends Berkshire Hathaway and PepsiCo. The Motley Fool recommends Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. 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.