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Better Buy: Altria Group Inc. vs. Philip Morris

Between them, Altria Group (NYSE: MO) and Philip Morris International (NYSE: PM) have divided up the world's tobacco industry. Sharing their key Marlboro brand, Altria focuses on the U.S. market, while Philip Morris has become the key international player in the global cigarette industry. Yet despite the fact that the two companies still work together on key initiatives like reduced-risk products, investors want to know which will reward them more in the long run. Let's take a closer look at Altria Group and Philip Morris International to see which one looks like the smarter pick right now.


Image source: Altria Group.

Valuation and stock performance

Both Altria and Philip Morris have seen solid gains over the past 12 months. Since November 2015, Philip Morris stock has risen by 11%, just slightly lagging Altria's 14% total return.

From a valuation standpoint, the two stocks appear to be relatively close to each other, at least using simple valuation metrics. When you look at what the companies have earned over the past 12 months, Philip Morris looks a little bit less expensive, sporting a trailing earnings multiple of 21. Altria Group is just a bit higher at 23 times trailing earnings.

However, when you incorporate expected future earnings growth into the mix, the two stocks converge. Both Philip Morris and Altria have stock prices that are at about 18 times forward earnings estimates, with Philip Morris having an advantage of less than half a point. That might be enough for some to give the slightest of edges to Philip Morris, but for most, the two tobacco giants are essentially valued similarly by the market right now.

Dividends

For dividend investors, evaluating Altria and Philip Morris depends on what you prefer. In terms of current dividend payouts, Philip Morris has the advantage, sporting a 4.7% yield. Altria's dividend yield is still strong compared to the rest of the market, coming in just shy of the 4% mark.

Yet when you look at other measures of dividend strength, the picture isn't as clear. Both stocks have good histories of dividend growth over time, but Altria's boosts to its dividend have been much healthier recently. Just a few months ago, Altria rewarded investors with an 8% dividend increase, sending its quarterly payout up to $0.61 per share and marking the seventh straight year that the domestic tobacco leader had given shareholders a boost in the 7% to 9% range. By contrast, Philip Morris only raised its quarterly dividend by 2%, marking the second year in a row it failed to live up to the double-digit percentage dividend increases it made earlier in its history as an independent company. Which stock looks better on the dividend front depends on whether you value current income more than the likelihood of future dividend increases.

Growth prospects

In terms of growth, Altria has had a better time than Philip Morris in producing the financial results that investors have wanted to see. In its most recent quarter, Altria said that it managed to raise its revenue by 3%, and despite one-time charges that depressed generally accepted accounting principles (GAAP) net income, adjusted earnings were healthier than most investors had expected. Cigarette shipment volumes were weak, but the smokeless tobacco and wine divisions produced more impressive growth that helped lift the overall company higher. Moreover, with the closing of the SABMiller acquisition, Altria said that it hopes to see continued contributions to its earnings from its nearly 10% stake in Anheuser-Busch InBev (NYSE: BUD). The company kept its guidance for the full year, expecting earnings growth of 6.5% to 8.5% from 2015 levels, despite some of the challenges it sees.

Meanwhile, Philip Morris managed to get itself back onto the growth track, albeit at the slowest of paces. Sales climbed just less than 1%, and Philip Morris managed to produce a $0.01 per share increase in adjusted earnings compared to the year-ago quarter. Yet a massive 5.4% drop in cigarette shipments was far worse than its domestic counterpart's drop, and even though negative impacts from weak foreign currencies compared to the U.S. dollar continued to hold the company back, investors seemed uncertain about how to assess the company's fundamental prospects going forward. One piece of good news is that the Philip Morris iQOS heat-not-burn alternative to traditional cigarettes has taken off in early test markets, achieving a 3.5% market share in Japan during the quarter. Future initiatives on the reduced-risk front could help both Philip Morris and Altria, as they share a collaborative partnership on technology and regulatory efforts.

For now, Altria seems to have the upper hand when it comes to its stock being a better buy. With comparable valuations and better prospects for growth both in dividends and in its core business, Altria gives investors an edge over Philip Morris and its ongoing international challenges.

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