Photo credit: www.fool.com
Investors looking to delve into tobacco stocks have limited options available, making Altria (MO) and Philip Morris International (PM) the two standout choices. Though both companies have historical ties as former parts of the same enterprise until their split in 2007, they have since carved out distinct paths. Altria retained its operations within the U.S., while Philip Morris expanded its reach internationally.
This analysis will examine the two companies’ current performances and prospects.
Comparing Business Models: Altria and Philip Morris International
At first glance, it might seem like Altria and Philip Morris share identical business models since they are both involved in cigarette production. However, notable differences exist.
Both companies are actively diversifying their portfolios away from traditional cigarettes towards innovative smoke-free products. Nonetheless, Philip Morris has achieved considerably more success in this domain. The company has made significant strides with its Iqos heat-not-burn devices, which utilize tobacco sticks and have gained substantial traction in major markets, including Japan. It also acquired the rights to market Iqos in the U.S. from Altria.
Additionally, Philip Morris has successfully acquired Zyn, a brand of oral nicotine pouches, as part of its purchase of Swedish Match, and is ramping up production to satisfy increasing demand.
In 2024, Philip Morris reported impressive growth in its smoke-free segment, with a 14.2% rise in revenue, demonstrating that these products now account for 40% of its overall revenue, indicating a shift away from reliance on traditional cigarettes.
Conversely, Altria has encountered significant challenges, particularly following its $12 billion investment in Juul, which plummeted in value due to stringent regulatory pressures. Furthermore, its venture into the cannabis market through a minority stake in Cronos Group has not yielded the expected results.
Currently, Altria is banking on its recent acquisition of Njoy, the producer of e-cigarettes and vaping products, for $2.7 billion in 2023. This acquisition comes with full marketing authorization from the FDA, a crucial step to avoid the pitfalls experienced with Juul.
Njoy is delivering commendable growth for Altria, with a reported 15.3% increase in consumable shipment volume, totaling 12.8 million units. However, smokable products still represent nearly 90% of Altria’s total revenue.
Financial Performance: Altria vs. Philip Morris
When scrutinizing their financial results, Philip Morris’s international operations provide a significant advantage since it operates in markets where smoking is not subject to the harsh regulatory and cultural challenges prevalent in the U.S.
In 2024, Altria experienced a revenue decline of 1.9% to $24 billion, primarily due to a 10.2% decrease in cigarette shipment volume, though this was partially mitigated by raised prices.
Despite the revenue drop, Altria remains profitable, showcasing an adjusted operating margin of 61.2%, with adjusted earnings per share ticking up by 3.4% to reach $5.12.
In stark contrast, Philip Morris reported a modest growth in international cigarette volume of 0.6% in 2024, totaling 616.8 billion units, highlighting more favorable market conditions outside the U.S. The company’s total revenue grew by 7.7% to $37.9 billion, while operating income surged by 16% to $14.9 billion. Adjusted earnings per share rose significantly, increasing by 15.6% to $6.95.
Dividend and Valuation Insights: Altria vs. Philip Morris International
Historically, Altria has been known as a prime dividend stock, and this reputation persists with a current yield of 7%. The company has maintained a consistent track record of annual dividend increases.
In terms of valuation, Altria trades at a price-to-earnings (P/E) ratio of 11.3 based on its trailing adjusted earnings per share.
On the other hand, Philip Morris’s valuation reflects its rapid growth, with a dividend yield of 3.5% and a P/E ratio of 22 based on its adjusted earnings per share of 6.95.
Thus, while Altria offers a higher dividend yield and a more attractive valuation, the relative stability of Philip Morris should not be overlooked.
Evaluating the Better Investment
Despite Altria’s apparent breakthrough with Njoy, the company continues to see a decline in revenue, facing stronger competition in its core cigarette business compared to Philip Morris.
In contrast, Philip Morris thrives with its innovative product lines such as Zyn and Iqos, which are contributing to its robust growth. Even its traditional cigarette segment is managing to deliver positive results.
While investing in Philip Morris comes at a premium price, the rationale behind this valuation is clear. The company’s focus on next-generation products presents a promising roadmap for sustainable growth, making it a potentially worthwhile investment for those looking toward the future of the tobacco industry.
Source
www.fool.com