Altria vs. Philip Morris: Which Tobacco Giant is the Better Buy?

In the ever-evolving landscape of the tobacco industry, two giants stand out: Altria Group (NYSE: MO) and Philip Morris International (NYSE: PM). Both companies have a rich history and a significant presence in the market, but their strategies and performance in recent years have diverged. As investors look for the best stock to buy right now, it's crucial to delve into the nuances of each company's business model, regulatory environment, and financial performance.

The Regulatory Landscape: A Tale of Two Markets

Altria operates primarily in the United States, a market characterized by stringent tobacco regulations. The U.S. has seen a significant decline in cigarette consumption, which has forced Altria to focus on raising prices to compensate for falling volumes. In its fourth-quarter earnings report, Altria reported a 7.6% decline in cigarette shipment volumes to 18.2 billion, and overall revenue, excluding excise taxes, fell 2.4% to $4.35 billion. This regulatory environment has made it challenging for Altria to innovate and diversify its product portfolio.

In contrast, Philip Morris International operates in more than 180 markets around the world, including many international markets that face less tobacco regulation than the U.S. This has allowed PMI to develop its next-generation business more effectively. PMI reported a decline in cigarette volume of just 1.9% to 151.1 billion, while sales of its heated tobacco units (HTUs), largely IQOS, rose 6.1% to 34 billion. This indicates that PMI's international operations provide it with more opportunities to grow its next-gen products, which are less harmful alternatives to cigarettes.

Next-Generation Nicotine Products: The Race for Innovation

Both Altria and PMI have been investing in next-generation nicotine products, but their strategies and success rates differ significantly. Altria has made several attempts to diversify its product portfolio beyond traditional cigarettes, but these efforts have largely been unsuccessful. For instance, Altria invested $12.8 billion in Juul Labs in 2018, but a regulatory crackdown significantly reduced the value of this investment. Similarly, Altria's investment in the Canadian cannabis grower Cronos Group led to write-downs and losses. More recently, Altria acquired NJOY for $2.75 billion, hoping to capitalize on its diverse portfolio of disposable e-cigarettes and reusable pod vapes. However, NJOY's revenue is believed to be a fraction of Altria's, and its value lies primarily in its growth potential. Additionally, Altria sold the commercialization rights in the U.S. for PMI's heat-not-burn system IQOS back to PMI, indicating a focus on NJOY as its next-gen product. The U.S. International Trade Commission (ITC) issued an exclusion order and cease-and-desist orders barring the importation and sale of NJOY's ACE product, which could further hinder Altria's progress in this area.

In contrast, PMI has been more successful in developing its next-generation business. PMI reported a decline in cigarette volume of just 1.9% to 151.1 billion, while sales of its heated tobacco units (HTUs), largely IQOS, rose 6.1% to 34 billion. PMI's purchase of IQOS rights for the U.S. from Altria for $2.7 billion indicates confidence that it can make that product successful in the U.S. Because of its success in HTUs, PMI's overall product shipment volume is nearly flat, and it is on the verge of driving positive growth as HTUs replace cigarettes. PMI's adjusted revenue grew by 8.3% to $9 billion in the fourth quarter, demonstrating its ability to generate revenue from next-generation products. PMI's leading smoke-free product, IQOS, is typically marketed with consumables under the brand names TEREA, HEETS, and others, indicating a strong brand portfolio in this sector.

Financial Performance: The Numbers Speak for Themselves

While Altria is more profitable based on margins, with an adjusted operating income margin of 59.9% compared to 33% for PMI, PMI's growth in next-gen products provides it with a more sustainable business model in the long run. This is reflected in PMI's adjusted operating income growth of 3.7%, compared to Altria's flat adjusted operating income. PMI's success in HTUs has led to solid revenue growth, with adjusted revenue up 8.3% to $9 billion in the fourth quarter. In contrast, Altria's dividend does look safe for now, but it can't rely on raising cigarette prices forever. While the NJOY acquisition could pay off, it could also take years for it to positively impact the bottom line.



The Verdict: Which Stock is the Better Buy?

In conclusion, while Altria might be more appealing to dividend investors strictly looking for yield, Philip Morris International is the better choice for long-term growth. PMI has a much brighter future as its next-gen business has reached scale and cigarette volumes are declining more slowly, and it doesn't face the same regulatory restrictions that Altria does. Altria's dividend does look safe for now, but it can't rely on raising cigarette prices forever. While the NJOY acquisition could pay off, it could also take years for it to positively impact the bottom line. Only one of these stocks offers growth, stability, and high yield, and that's Philip Morris International.