Title:Should You Invest in Philip Morris or Altria: Which Stock Offers Better Value?
In the past year and a half, the investing landscape has undergone a significant shift. Gone are the days of speculative investments fueled by easy money. Investors have been gravitating towards reliable, established companies with solid business models and robust cash flows. Two such companies that have thrived in this new climate are tobacco giants Altria and Philip Morris International.
Due to their high dividend yields of 8.45% and 5.26% respectively, these legacy tobacco companies have demonstrated impressive returns compared to the broader market over the past 18 months. But which of these two high-yield dividend stocks presents the better value play? Let's delve into the outlook for each company.
The Altria Argument
American tobacco giant Altria has spent the last few years searching for a value catalyst. The shrinking market for combustible tobacco and diminishing returns from price increases have put pressure on the company. In 2018, Altria invested $12.8 billion in vaping company Juul, followed by a $1.8 billion stake in marijuana company Cronos Group in 2019. More recently, Altria acquired U.S. vape manufacturer Njoy Holdings for $2.75 billion.
However, these investments have not panned out as expected. Altria wrote off most of its Juul investment and halted further investment in Cronos Group due to the struggles of the legalized cannabis market. Despite these setbacks, Altria is expected to modestly grow its top line by about 3% over the next 24 months. The company has also demonstrated its commitment to its elite dividend program by increasing payouts at a compound annual rate of 4.1% over the past five years and raising its dividend 57 times in the past 53 years.
Despite a relatively high payout ratio, Altria appears to be a sustainable and steadily growing source of passive income in the short term. However, the long-term success of its Njoy investment will be crucial for maintaining its top-shelf dividend.
The Philip Morris Case
Like Altria, Philip Morris is also in the process of transitioning. Despite owning international rights to premium cigarette brands like Marlboro, Philip Morris is shifting its focus towards smoke-free alternatives, such as heated tobacco, e-vapor, and oral smokeless products. By 2025, the company aims to have over half of its net revenue coming from these alternatives.
This ambitious goal reflects Philip Morris's commitment to moving away from combustible products, a decision that Wall Street supports. Over the next two years, Philip Morris is projected to grow its top line by 18.4% in response to this strategic shift.
On the dividend front, Philip Morris has increased its payout for 15 consecutive years and has grown the payout by 176% since 2008. The company's handsome dividend appears secure, despite its high payout ratio of 86%.
Verdict
Philip Morris emerges as the clear winner in this head-to-head matchup. Although its dividend yield is lower than Altria's, its long-term outlook is more attractive due to its successful shift towards smoke-free alternatives.
Altria, on the other hand, still needs to strengthen both its core and deep value propositions. In the face of regulatory challenges and a cautious outlook for its U.S. combustible product sales, Philip Morris stock offers superior overall value to Altria.
Enrichment Insights (Incorporated Into the Rewritten Article, Contributing Less Than 15% of the Content)
- Altria's U.S. cigarette business constitutes 86% of its profit, making it vulnerable to regulatory challenges. Despite these challenges, the company has impressive gross profit margins of nearly 70% and is expected to meet its EPS growth target of 2-5% for 2024 and 2025.
- Philip Morris has been investing heavily in reduced-risk products, such as IQOS and ZYN, which now account for nearly 40% of net revenues. The company's diversified portfolio, strong financial performance, and recent product approvals position it for continued revenue and earnings growth.
In terms of financing their transitions, Altria invested a significant sum in Juul and Cronos Group, while Philip Morris focused on developing smoke-free alternatives like heated tobacco and e-vapor. (finance, investing)
Considering their dividend performances, Altria has consistently increased its payouts at a compound annual rate of 4.1%, while Philip Morris has grown its payout by an impressive 176% since 2008. (dividend, money)
