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Both Philip Morris (NYSE:PM) and Altria (NYSE:MO) are cigarette companies that engage in the manufacture and sales of cigarettes and other tobacco products. Altra is a little more diversified, having a winery division under the Chateau Ste. Michelle and Columbia Crest names, and has a sizable domestic US presence whereas Philip Morris operates primarily in the international markets.

The domestic market is more highly regulated and as a result provides less opportunities for growth than the international market (e.g. 1998 Master Settlement Agreement, which restricts company advertising and imposes monetary penalties with respect to funding public education and paying part of the costs incurred by the states in treating illnesses related to smoking (Shweta Dubey - Motley Fool article - These Tobacco Stocks Are Hard to Quit - March 1/2013).

Regardless of this, these companies still remain profitable and throw off to the income-oriented investor nice and growing dividends. The purpose of this article is to determine which company is the better investment based on the environment they operate in and on some important financial metrics. The issue here is the safety and growth of the income stream moving forward.

Regulatory Environment

Altria derives most of its income still from the more highly regulated US market (69% of total sales versus 31% from the international market whereas Philip Morris operates primarily in the foreign markets (Alex Cho article). As a result, we can see from the table the stark differences in revenue growth for these two companies over the last three years.

Revenue Growth 2010 - 2012 (000's)

201020112012percent growth



annual reports and Yahoo Finance

Financial Metrics

Philip Morris is operating in a better market and is clearly better managed than Altria based on the ROA. (For purposes of comparison, this ratio is used to eliminate the differences in capital structure) Philip Morris' ROA is 23.80% versus 12.62% for Altria (Yahoo Finance).

The amount of debt can present a level of financial risk to the company above and beyond the operating risk. A comparison between these two companies clearly shows that capital structure is not an issue for either, though Philip Morris has a higher level of protection than Altria based on the Times Interest Coverage.


Times Interest Coverage 2010 -2012

OPERATING INCOME (000'S)622860687253
INTEREST EXPENSE (000'S)113312161126


Philip Morris

Times Interest Coverage 2010 - 2012

OPERATING INCOME (000'S)112001333213846
INTEREST EXPENSE (000'S)876800859

source: annual reports and Yahoo Finance

Philip Morris clearly provides a higher level of protection for dividend payments by having a times interest coverage over two times that of Altria. The dividend payment looks very secure and it can be argued that it could be increased due to the high level of cash available after interest payments.

The final metric for comparison is corporate growth and how this corporate growth is passed on to the shareholder in the form of dividends on the one hand and whether there is something left over for reinvestment into the company to address future opportunities.


EPS growth and payout ratio 2010 - 2012

201020112012percent growth

Philip Morris

EPS growth and payout ratio 2010 - 2012

201020112012percent growth

source: yahoo finance

Altria's payout is quite high which may or may not be a red flag since it may indicate that the company does not see or is not focused on future opportunities and is neglecting its retained earnings. It may also indicate that it is relying on the capital markets for future financing if other opportunities were to arise.

Philip Morris, on the other hand, is clearly more profitable, and is doing an admirable job in addressing the income requirements of the investors on the one hand, and addressing its future financing requirements by adding to retained earnings on the other.

Final Metric: dividend yield

For the investor concerned with income, Altria has the advantage because it has a higher dividend yield, but this is accomplished by diverting most of the funds back to the investor. The payout is quite high averaging 85% over the last three years. This may give you a clue as to what corporate objectives may be over the next little while since it doesn't seem to be focused on future expansion.


- EPS estimate for FY2013 $2.39

- payout at 85% (3 yr. avg.) = $2.03

- forward yield based on Mar. 1/2013 stock price

2.03/33.49 = 6% yield

Phillip Morris

-EPS estimate for FY2013 $5.78

- payout at 60% (3 yr. avg.) = $3.46

- forward yield based on Mar. 1/2013 stock price

3.46/91.44 = 3.78% yield

source: yahoo finance


For the income investor concerned with safety and future growth of dividend income, the obvious choice is Philip Morris. The company is clearly more profitable and operating in a market that is growing and less regulated at this point. Operating for the most part in the US domestic market seems to have left Altria with fewer options.

Philip Morris's dividend payment is more secure due to its higher times interest coverage, and more importantly, it has the discretion and ability to increase the payout if it doesn't find any other more productive uses for the funds. Altria is almost at the limit with respect to the payout and doesn't have the same flexibility as Philip Morris has. The choice is clear. Philip Morris is the better choice for the investor concerned with income security and growth.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.