Tobacco stocks have traditionally been attractive to income investors, and with the industry narrowing down to three major players – Altria (NYSE: MO), Philip Morris International (NYSE: PM), and British American Tobacco – income-seeking investors may find value. In this comparison, we’ll focus on Altria and Philip Morris, two companies with similar product portfolios and a history of collaboration.
Following the 2008 split of the old Philip Morris into Philip Morris International and Altria, the latter retained domestic operations under the parent of Philip Morris USA, while PMI took charge of international territories. Since then, both companies have evolved. Let’s assess how the two stocks fare in various categories to determine the better investment option today.
The state of the business: Altria vs. Philip Morris
Both Altria (NYSE: MO) and Philip Morris International (NYSE: PM) face challenges tied to declining cigarette consumption in the tobacco industry. In its fourth-quarter earnings report, Altria revealed a 7.6% drop in cigarette shipment volumes to 18.2 billion, with overall revenue, excluding excise taxes, declining 2.4% to $4.35 billion.
Historically, Altria has offset falling cigarette volumes by raising prices and exploring new business avenues for growth. However, many of these endeavors, such as the investment in Juul Labs and Canadian cannabis grower Cronos Group, have faced setbacks.
Altria is now banking on NJOY, which it acquired for $2.75 billion in cash a year ago, to drive growth. NJOY brings a diverse portfolio of disposable e-cigarettes (branded Daily) and a vape with reusable pods (Ace). While NJOY’s current revenue is a fraction of Altria’s, its potential for growth is a key focus for the company.
On the other hand, Philip Morris appears to have certain advantages over Altria. It reported a more modest 1.9% decline in cigarette volume to 151.1 billion, benefiting from less tobacco regulation in international markets compared to the U.S. Philip Morris has also performed better in developing its next-gen business, with heated tobacco units (HTUs), primarily IQOS, rising 6.1% to 34 billion.
Philip Morris’s purchase of IQOS rights for the U.S. from Altria for $2.7 billion indicates confidence in its ability to make the product successful in the U.S. As HTUs replace cigarettes, Philip Morris is on the brink of achieving positive growth in overall product shipment volume. Notably, Philip Morris has found success with next-gen products, contributing to solid revenue growth, with adjusted revenue up 8.3% to $9 billion in the fourth quarter.
Profitability: Altria vs. Philip Morris
While Philip Morris is experiencing faster revenue growth than Altria, it holds the edge in profitability between the two. This is likely attributed to a significant portion of its sales coming from the premium Marlboro brand and the higher disposable income in the U.S. Altria reported an adjusted operating income margin of 59.9% last year, in contrast to Philip Morris’s margin of 33%.
Despite this, Philip Morris achieved a 3.7% growth in adjusted operating income, whereas Altria’s remained flat.
Valuation and yield: Altria vs. Philip Morris
Altria presently boasts a price-to-earnings ratio of 8.3, coupled with a remarkable dividend yield of 9.6%. In contrast, Philip Morris has a P/E ratio of 17.2 and a dividend yield of 5.8%. In this regard, Altria holds a distinct advantage.
And the winner is…
For investors prioritizing long-term growth, stability, and a reasonable yield, Philip Morris emerges as the superior choice over Altria. With a well-established next-gen business that has achieved scale and a more resilient decline in cigarette volumes, Philip Morris holds a brighter future. Additionally, the company isn’t burdened by the same regulatory constraints as Altria, providing a more favorable outlook.
While Altria’s dividend appears attractive for yield-focused investors, it cannot solely rely on continual cigarette price increases. The success of the NJOY acquisition remains uncertain and might take years to positively impact the bottom line. In conclusion, Philip Morris stands out as the stock offering a compelling combination of growth potential, stability, and a competitive yield.
