Tobacco companies are the best when it comes to payment of dividends. They are one of the highly preferred choices for investors for this very reason. Let us compare the dividends of the two of the biggest players in the tobacco market, Altria Group (MO, Financial) and Philip Morris International (PM, Financial). Both manufacture cigarettes under the Marlboro brand and both were held under the joint ownership of Altria till 2008, after which the international business unit of Philip Morris started functioning as a separate company. Various parameters like rate of dividend pay-outs, dividend yields and consistency of growth were taken into consideration and Philip Morris emerged the clear winner in all these categories. This is how it managed to score over Altria:
Small difference but big impact
The dividend yields of Philip Morris and Altria Group are 4.8% and 3.8% currently. While this may look like a minor difference, the impact created on the shareholders’ worth is quite high. This one percentage transforms into close to 26% increase in returns to investors. Charts showing the dividend yields of both the companies for the last few years are shown below:
In a period of five years, while Altria had increased its dividends by just 8%, Philip Morris had reported 11% increase in dividends. Increase in stock prices has not helped Altria either at least in its dividend yield department. As share prices increased, percentage of dividend yield got a big hit. Share price trend of both the companies for the last two years is seen below. Altria’s share prices increased by a whopping 59% in the recent couple of years, while share prices of Philip Morris had gone down by 6% for the same period. In terms of returns to shareholders through increased prices, Altria won hands down undoubtedly. However, when the discussion is about which is the better dividend stock; Philip Morris definitely has the upper hand.
Philip Morris
Altria Group
Free cash flow generating capacity
Dividend pay-outs and dividend-yields can never be one time affairs. For a company to be considered as a good dividend stock, it should pay out dividends on a consistent basis. What is the basis on which a company pays out dividends? Free cash flow, of course! While comparing the cash flow generating capacities of Philip Morris and Altria Group, these are the figures that were identified. During period between Q1 and Q3 2014, Altria Group and Philip Morris had generated $3billion and $5.5billion of cash flow respectively. Out of this, Altria paid out $2.8billion dividends (93% pay-out ratio) and Philip Morris paid out $2.88 per share in dividends (80% pay-out ratio).
With a very high pay-out ratio of 93%, Altria Group currently faces the risk of sustaining this high pay-out in the event of not being able to generate large amount of cash flow in the future. Philip Morris, on the other hand, is at a comfortable position and there is scope of increased dividends in the coming years as well.
Final take
In all parameters like dividend yields, pay-out ratios, ability to generate free cash flow and capacity of dividend growth in the future, Philip Morris stands to gain a lot. In addition to this, the share prices are currently trading at a big discount. This should give enough reasons for investors to buy stocks of Philip Morris right now. In the coming years, with international business all set to grow phenomenally, their prices would also see an upward surge; hence the timing can never be more right than now.
Every investor should understand that while choosing dividend stocks, various parameters should be considered. It is completely wrong to take a decision based on just the dividends being paid out currently or just the dividend yield rate.
