Have you ever wondered how a fight between two old giant smokers would end-up? With lots of smoke and coughing fits to boot! Seriously, today we are going to look at which is the better stock to hold between Philip Morris International (PM) and British American Tobacco (BTI). So which is the best tobacco stock?
First things first, I should apologize for the research I did on Philip Morris. I mentioned in my original post that PM generated 50% of its sales in the US… which is opposite of fact. PM produces international sales while Altria (MO) covers the US market. I was doing a lot of research on several tobacco stocks at the same time and used the wrong tab when I wrote that piece of info. Thx to Dizzy who told me via his comments.
So both stocks are comparable as they operate in the same international and emerging markets. This is also about the only place where you can see the tobacco market growing as we speak. Therefore, we are facing two companies with reasonable expectations for growth over the upcoming years.
Round #1 Dividend Growth BTI vs PM
Speaking of growth, let’s look at their dividend yield and dividend growth over time.
BTI: 4.20% dividend yield, 16.94% dividend growth over 5 years (22.92% last year)
PM: 3.81% dividend yield, 9.65% dividend growth over 1 year (5 years not available)
Payout ratio: BTI is at 79% while PM is at 61%
Even if the dividend payout ratio is slightly higher compared to PM, I give the first round of this dividend stock battle to BTI. Since they have a higher dividend yield and show a stronger habit of raising its dividend, I think BTI would fit comfortably in a dividend portfolio.
Round #2 Financial Metrics BTI vs PM
While the P/E ratio is very similar, PM seems to be growing a little bit faster recently. BTI is showing a 5 years growth similar to PM’s last year sales growth. However, it has slowed a bit (down to 4.75% from 9.38% over 5 years). The return on equity is far more impressive with PM.
While I give this round to Philip Morris International (for its recent sales growth and return on equity), I am cautious about PM. Since the spin off from Altria was made to let investors benefits from the “growing side” of the company, it is a bit normal that the short term results show great numbers compared to BTI.
Final Round: Business Perspective BTI vs PM
The last point I want to bring in this confrontation is future business perspectives. PM sells 7 of the 10 most popular cigarette brands but BTI seems more active on the acquisition side. If these 2 companies want to grow, they will have to do it via two strategies:
– Penetrating emerging markets
– Gaining market share via competitor acquisitions
In these 2 areas, I think BTI will make better moves and react more quickly. Why? Because PM may have kept some “old American habits” from its former company while BTI is going through Reynolds to sell its brand on the American market and has concentrated on international markets.
In the end, I declare BTI as the winner but not by KO. I’d say that BTI is a little bit more interesting for dividend investors, especially considering its dividend metrics. What do you think?
I also want to remind you that the idea of comparing these 2 stocks comes from one my newsletter readers. So if you want me to look at any other stocks, I suggest you subscribe to my newsletter (it’s free!) and contact me directly! It will be my pleasure to discuss investments with you!
Thanks for the write up on these two tobacco stocks. I love the tobacco industry as there is relatively little capital expenditure needed and a lot of the profit can be returned to the shareholder. It’s a cheap product to make, so the margins are pretty fantastic. I really like PM, with the great portfolio (especially Marlboro), but I will look into BTI a little more. Thanks again!
I had the same internal battle. Resolved it peacefully by buying into both!!
I enjoyed the battle, Mike! And MoneyCone, I’m with you…if you can’t beat ’em, buy them…all of them! 🙂
BTI was off my radar, but I’ve been a big fan of PM historically. I think I’ll take a close look at BTI now that PM’s yield has been compressed by price appreciation. Thanks for the interesting article.
BTI (or BATS in London Stock Exchange) has been a wonderful investment. It has a long track record of high dividend and high growth. It is one of the main cores of my Dividend Growth Portfolio. To make and idea of how good BATS has been just check this data: British American Tobacco (LSE: BATS) Dividend-Adjusted Return 30 Nov 2000-30 Nov 2010: 638% Amazing, isn’t it?