Motley Fool
0
All posts from Motley Fool
Motley Fool in Motley Fool,

Better Buy: Sturm, Ruger & Company vs. Altria

Sturm, Ruger (NYSE: RGR) and Altria Group (NYSE: MO) both qualify in some investors' eyes as sin stocks because of their respective focuses on firearms and tobacco. Yet that doesn't mean that you can't make money investing in the two companies, and many investors feel quite comfortable with investing in these areas as long as their investments will be successful.

With long histories of achievement, both companies are compelling in several ways, and those looking at the stock are naturally curious which one is the more attractive pick right now. Below, we'll look at Sturm, Ruger and Altria and analyze their prospects using some simple methods to decide which one is the better buy.

Valuation and stock performance

Both Sturm, Ruger and Altria have lost ground over the past year, but the tobacco giant has held up much better. Altria has seen just a 3% drop in its share price since August 2016, while Sturm, Ruger has lost more than a quarter of its value over the same time period.

Image source: Altria Group.

At first glance, the two stocks appear to have relatively similar valuations. When you look solely at earnings over the past 12 months, Altria actually ends up looking a little bit cheaper despite its superior share-price performance, trading at a trailing earnings multiple of less than nine compared to Sturm, Ruger's corresponding figure of almost 11. Yet Altria's recent earnings have been inflated by one-time gains related to the sale of its interest in SABMiller, and that gives a skewed view of its earning potential going forward.

When you look at near-term future expectations on the bottom line, Ruger's advantages become clearer. Ruger carries a forward multiple of just 11, while Altria's current stock price is above 18 times forward earnings. Sturm, Ruger has the more favorable valuation, albeit with weaker share-price momentum recently.

Dividends

Both Sturm, Ruger and Altria have demonstrated a solid commitment to their shareholders through dividends, but they have different philosophies toward how they return capital to shareholders. When you look solely at the dividend payments that the two companies have made in the past 12 months, Ruger's yield amounts to 3.1%, but Altria has a much more attractive 3.8% yield. The two companies' payout ratios look quite similar, but again, Altria's figure is artificially deflated by gains from the SABMiller sale. Ruger's figure below 50% is better than the adjusted figure for Altria, which is likely in the neighborhood of 65% to 70% after accounting for the one-time gain.

One thing to remember with Ruger is that its dividend varies from quarter to quarter based on its earnings. Until recently, that had been a positive for the company, but Ruger said in its most recent declaration that its dividend payment would plunge by more than half, to $0.23 per share. By contrast, Altria has been consistent in its dividend growth over nearly half a century, with only spinoffs and other corporate transactions preventing it from gaining coveted Dividend Aristocrat status.

From a dividend perspective, Altria has the edge because of its stability and predictability. Ruger has a good long-term track record as long as you're willing to assume the risk of a poor quarter weighing on its results.

Growth and risk factors

Both Ruger and Altria have had to deal with positives and negatives to their respective businesses. Ruger's second-quarter financial report was particularly ugly, featuring a drop in sales by more than a fifth and a shortfall of nearly half on the bottom line compared to what most of those following the stock had expected to see. The gunmaker said that several of its rivals in the gun industry have been using steep discounts in order to spur greater sales, and that has hurt Ruger's competitive position. A recall of Ruger Mark IV pistols also potentially hurt sales for the gunmaker. Unless some external event sparks greater demand for weapons -- a prospect that became less likely after the results of 2016's U.S. presidential election -- then it could be difficult for Ruger to regain the strong growth it has enjoyed in the past.

Altria has gotten its own share of bad news lately. The U.S. Food and Drug Administration proposed new regulations that would require cigarette manufacturers to decrease the amount of nicotine that goes into their products to a non-addictive level. Fundamentally, Altria has continued to see a secular decline in cigarette use, and price increases have remained necessary to offset the downward impact of steadily decreasing sales volumes.

Altria is optimistic about its new stake in beer-giant Anheuser-Busch InBev (NYSE: BUD), which it obtained as part of the compensation for the sale of its SABMiller stake. Yet Altria hasn't yet fully embraced a future strategic vision for the tobacco industry, seeking both to participate in research on reduced-risk products while wanting to maintain its stranglehold on the traditional cigarette business, as well.

All told, Altria is in a stronger position that Ruger right now. The tobacco company has been able to stay increasingly profitable even under tough conditions, while Ruger has proven to be more vulnerable to the wide swings in the gun market. Ruger will need to have better conditions prevail in order to bounce back from its weakness recently.

10 stocks we like better than Sturm, Ruger & Company
When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has tripled the market.*

David and Tom just revealed what they believe are the 10 best stocks for investors to buy right now... and Sturm, Ruger & Company wasn't one of them! That's right -- they think these 10 stocks are even better buys.

Click here to learn about these picks!

*Stock Advisor returns as of August 1, 2017

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Anheuser-Busch InBev NV. The Motley Fool has a disclosure policy.