When it comes to Altria (NYSE:MO)The big attraction for most investors will be the huge dividend yield of 8.9%. However, yields typically don’t rise this high without good reason, which is why most long-term dividend investors should probably consider this Philip Morris International (NYSE:PM) instead, despite lower yield. Here’s what you need to know to make the call:
The similarities and differences between Altria and Philip Morris International
In early 2008, Altria spun off Philip Morris International. In fact, Altria retained the rights to sell Philip Morris brands in the United States, while Philip Morris International sold the same brands outside the United States. In this way, the two companies share the same iconic cigarette brand portfolio, which also includes industry giant Marlboro.
According to Altria: “Altria’s board and management believed that the spin-off would allow each of Altria’s international and domestic tobacco businesses to focus exclusively on realizing its own opportunities and addressing its own challenges, thereby providing long-term shareholders “To create value.”
The big problem is the worldwide move away from cigarette smoking. Both are working to find new nicotine-based products to offset declines in their core cigarette business. However, since Altria only focuses on one market, the risk involved is more binary. Philip Morris International benefits from diversification as it has different markets in its portfolio. Altria’s extremely high dividend yield is at least partly a sign of this increased risk.
Altria stumbled
However, Altria was an early investor in vape maker Juul and marijuana company Cronos. At the time of the investment, both made sense as they could help the company expand beyond cigarettes. However, neither proved successful, and both resulted in massive write-downs and one-time charges.
Altria is trying e-cigarettes again after recently acquiring Njoy. Although it is still early days, Njoy was at a later stage of business development when it took over and the likelihood that the deal will be successful is probably higher. But it’s hard to ignore Altria’s poor track record in large corporate moves.
This also includes the spin-off from Philip Morris International. Although the two do not compete in cigarettes, Philip Morris International is increasingly a competitor in non-cigarette areas in the United States. So by spinning off Philip Morris International, Altria essentially created a competitor. Altria’s string of poor strategic decisions is another reason the stock’s dividend yield is so high.
Philip Morris International is succeeding where Altria couldn’t
In an industry undergoing major change, Philip Morris International has simply performed better. The company’s 2023 annual report provided an update on its success: “In 2023, our portfolio of smoke-free products accounted for 36.5% of total net sales, with 25 markets generating more than 50% of their total net sales from smoke-free products.” As of year-end Our smoke-free products had around 33 million users and were available in 84 markets.
While Philip Morris International’s dividend yield is lower at 5.4%, the company’s business shift is clearly going relatively well compared to Altria’s efforts. Investors reward the company for its success, noting that more than a third of its sales have nothing to do with cigarettes.
Price increases are not a long-term plan
Altria has supported its dividend by introducing price increases. That’s worked well so far to offset ongoing declines in the company’s cigarette business, and it will likely continue to do so for at least a while. But at some point, Altria’s price hikes will likely begin to worsen its cigarette sales woes. And given management’s poor track record of finding alternatives, this isn’t a “set it and forget it” dividend investment. The high return comes with a high risk.
Most long-term dividend investors would be better off accepting a lower yield from Philip Morris International. This still gives you a significant source of income, but that income comes from a similar business operating at a much higher level.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends Philip Morris International. The Motley Fool has a disclosure policy.
“Forget Altria: This Stock Is a Much Better Buy Now” was originally published by The Motley Fool