When it comes to the tobacco industry, it’s like watching a fierce competition between heavyweight boxers – British American Tobacco (NYSE:BTI), Altria (MO), and Philip Morris (NYSE:PM) going toe-to-toe. These titans draw in a crowd eager for the high-stakes dividends that come with investing in these companies.
These cigarette behemoths are currently offering yields in the high single digits, a stark contrast to the market’s (SPY) yield of 1.42% or the 3.58% yield from the popular Schwab U.S. Dividend Equity ETF (SCHD).
|Market Cap (b)
|British American Tobacco
For those who pursue dividends, these companies seem like the Holy Grail, promising a steady income in a market fraught with uncertainty.
But beware, my dear readers, for I have seen the charade behind this smokescreen. Once a believer in the indomitable allure of tobacco dividends, I have since woken to the harsh reality of their dwindling returns. The once formidable tobacco fortress is now under siege, as the very foundation of its kingdom – its customer base – erodes by the day.
I sounded the bell of caution on Altria not long ago, giving it a firm “Sell” rating, much to the surprise of many. Today, our gaze falls upon two other giants: Philip Morris and British American Tobacco. And I aim to unearth which of these Goliaths stands strong and which could soon come toppling down.
Let the duel begin!
The Decline of an Empire, the Rise of Its Nemesis
In the tumultuous arena of the tobacco market, there’s no denying the undeniable truth – traditional cigarettes are losing ground faster than a sandcastle at high tide.
The decline of the smoking empire has been steadily plotted and meticulously documented. Once boasting a formidable 45% of U.S. adults, the smoking realm has now shrunk to a mere 20%. The young, who once flocked to the allure of cigarettes, now shun them like the plague, with only 1 in 10 choosing to partake in this ancient ritual.
But fear not, for where there is a fall, there is often a rise. Behold the ascent of vaping, heated tobacco, and e-cigarettes, now embraced by 8% of U.S. adults. A Renaissance of sorts, it’s the young who champion this new wave, with almost double the propensity to adopt these alternatives over traditional cigarettes.
Cigarettes may be waning, but the allure of these novel alternatives burns bright. The once unthinkable is now reality, with marijuana eclipsing cigarettes in popularity. The winds of change blow, and the cigarette kingdom quivers under its force.
But amidst this upheaval, a pillar stands unshaken. Philip Morris, with its “IQOS” brand, reigns supreme over the heated tobacco market in both the U.S. and the international arena. Its dominion is unchallenged, positioning it as the unrivaled monarch in this new age of smoking trends.
1:0 Philip Morris vs. British American Tobacco
The Mirage of High Yields
To be seduced by high dividend yields is a tale as old as time. The allure of “DRIP,” the art of reinvesting those hefty dividends, is a siren’s call to many an investor.
But let us not be beguiled. Let us instead cast our gaze back to January 1, 2013, a time when the land was parched, and the promiseof returns seemed but a mirage. It was then that the truth revealed itself – high yields were but a veil, concealing lackluster returns.
Take heed, for the vapors of these dividends may cloud your judgment. Though alluring, they may harbor naught but a hollow promise, veiling the true tale of stagnation and decline.
Let their enchantment not enthrall you, for the dividends of the giants may lead you down a path of disillusionment.
In this grand tale of tobacco titans, the stage is set, the stakes are high, and the curtain rises upon a realm of unfurled truths – choose wisely, for not all that promise riches deliver.
Fuming Over Big Tobacco Investments: Philip Morris vs. British American Tobacco
The current investment landscape has gone up in flames for big tobacco companies, with an 8.72% trailing twelve-month yield holding British American Tobacco (BTI) in good stead. However, a closer look at the financial bonfire reveals a stark contrast – as Philip Morris International (PM) seems to emerge as the phoenix rising from the ashes.
So, What Does The Future Hold?
Looking back at the returns, despite BTI showing significantly lower returns than PM, the last 5 years have seen BTI achieve a 3.49% CAGR in revenue, surpassing PM’s 2.42% CAGR over the same duration.
Similar trends emerge when looking at diluted EPS over the past 3 years: BTI experienced an 11.86% CAGR in EPS growth while PM managed a mere 1.43%. However, investing isn’t solely about historical figures; it’s about anticipating what lies ahead. Valuation changes, whether expansion or contraction, heavily hinge on future expectations.
Analysts project BTI to achieve revenue growth of roughly 3-5% over the next 4 years while expecting EPS to remain nearly flat during this period. This forecast is grounded in BTI already operating with an incredibly efficient business model, boasting an 83.5% Gross Margin. There’s limited room for further improvement, indicating that EPS growth can primarily stem from revenue growth which is not expected to be anyhow worthy to talk about.
In PM’s case, the spotlight falls on the heated tobacco market – a standout feature. The company seems to be adjusting more effectively to the increasingly demanding landscape faced by big tobacco firms, aiming for an average revenue growth of 5% to 7% until 2027. However, it’s important to note that PM’s business model isn’t as streamlined yet, with its Gross Margin currently at 63.1%. There’s still potential for efficiency improvement, and this is why analysts are eyeing EPS growth in the upper single digits as well.
Dividends & Buybacks
When it comes to investing in big tobacco, the primary motivation should typically revolve around the dividend yield, especially if your retirement plans hinge on it. Otherwise, justifying the total returns might be a challenge if dividends aren’t a key focus.
In terms of yield, BTI emerges as the top choice, boasting a trailing twelve-month or “TTM” yield of 8.72% compared to PM’s 5.43%.
However, it’s crucial to note that BTI’s dividend growth has been nearly stagnant, while PM has seen its dividend grow at a 2.94% CAGR over the past 5 years.
It’s worth considering that BTI’s primary listing is on the London Stock Exchange, with its U.S. trading being in the form of an ADR. This setup means the underlying dividend is in GBP, subject to FX fluctuation risks.
One advantage, especially for Europeans, is that investing in BTI means your broker won’t automatically charge you the dividend tax, as it might for U.S. listings, allowing you to receive the entire dividend amount.
What’s more troubling about BTI is its shares outstanding, especially for companies whose markets are in terminal decline. I’d like to see them aggressively repurchasing shares to alleviate the pressure on how much free cash flow, or ‘FCF,’ is allocated to dividends.
However, BTI increased its share count in the last decade by 18.8%, primarily due to the acquisition of Reynolds American Inc. in 2017. This led to the issuance of 429 million new BTI ordinary shares, diluting existing shareholders – a move I don’t appreciate, especially for a company with significant free cash flow.
Big Tobacco Battle: Tobacco Titans Go Head-to-Head in Investment Showdown
Philip Morris has been chiseling away at its share count over the last decade, albeit at a lackluster pace compared to Altria. However, British American Tobacco seems to have taken the lead with its superior yield, clinching the crown in this showdown.
When it comes to valuation, both companies are trading at a considerable discount compared to the high-flying tech giants, making them attractive bets in today’s market climate. British American Tobacco takes the lead with its dirt-cheap valuation of 6.83x its FY23 earnings, outshining Philip Morris’ 18.26x.
In terms of relative valuation, British American Tobacco’s cheaper price tag gives it the edge, though Philip Morris is expected to become more attractively valued as it gears up for growth.
As for which stock to buy and which one to sell, Philip Morris emerges as the primary choice for investment income seekers, while British American Tobacco’s lack of growth drivers makes it a less favorable option, according to the criteria outlined in this article.
While the allure of dividend growth from these tobacco giants may beckon, alternative investment opportunities outside this smoke-filled arena should warrant consideration, especially amidst the Federal Reserve’s rate hikes.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.