Phillip Morris International Inc. (PM, Financial) and Altria Group Inc. (MO, Financial) are leading tobacco companies with a combined market capitalization of $233 billion.
Altria spun off Phillip Morris International in 2008, keeping Phillip Morris USA and its stake in SABMiller, which is now part of the world’s largest brewer, Anheuser-Busch InBev (BUD, Financial). Altria’s Marlboro brand still has about 40% of the market for cigarettes in the U.S. and continues to absolutely pound out cash. Most of this cash gets paid out as dividends, which have grown nicely over the last decade.
Phillip Morris International is still the largest tobacco company by market value. It operates in more than 100 countries and has 25% global market share of cigarettes, making it the largest manufacturer outside China.
Phillip Morris generated net income of $6.4 billion on $30 billion in sales over the last 12 months, while Altria generated $10 billion of profit on $25.2 billion in sales. Both companies have wide economic moats and will continue to increase earnings per share, dividends and value for shareholders.
Altria dominates the U.S. market in more than just cigarettes. In cigars, the company has a 26% share with its large machine-made Black & Mild brand. In smokeless products, it has 55% share with the Copenhagen (32%) and Skoal (19%) brands.
Phillip Morris International is the only one of the top four companies (outside of China National Tobacco) to have increased its market share since 2008, but the company is placing heavy bets on heated tobacco products - the iQOS electronic cigarette - in hopes it can switch smokers to its e-cigarette platform while maintaining its brand value. The iQOS was launched under the Marlboro and Parliament brand umbrellas and has gained some traction.
The truth is, no matter what shape tobacco products take, they will remain highly sought-after products, only becoming more expensive with inflation and government regulations. Regardless of the emotions people place on its use, over the next 10, 20 and 30 years there will be more tobacco users than there are today.
The reason to own these stocks right now is twofold. One, the dividend rate makes both Atria Group (4.66%) and Phillip Morris International (5.50%) worthy placeholders in any portfolio, especially at this price. Two, both stocks are priced below historical multiples with Altria being the better bargain based on that metric.
Phillip Morris is off 25% year to date. Altria is off 17%. Any revaluation upward to either company’s average price-earnings ratio would put Altria in the $73 range and Phillip Morris in the $100 range, gains of at least 20% each.
Disclosure: I am not long or short any stocks mentioned in this article.
