A $1,000 dollar investment in Philip Morris in 1957 would have been worth $5.8 million by 2007. It is impossible to invest in the 'old' Philip Morris company, as it has since renamed itself and split into several parts. The company changed its name to Altria in 2002. In 2007, Altria spun off Kraft. The next year Altria spun-off its international business, calling it Philip Morris International. In 2012 Kraft spun off Mondelez. The 4 publicly traded businesses that make up the old Altria company are:
Which of these four businesses has performed best since the final spin-off from Altria in 2008? This article will examine the total return of Altria, Philip Morris International, and the combination of Kraft and Mondelez since 2008. Finally, each business will be examined today to determine which is most likely to reward shareholders with the highest CAGR going forward.
How to Measure Total Return
Businesses have direct control over how they allocate capital. They can distribute excess capital to shareholders through dividends or share repurchases. If management believes shares are undervalued, share repurchases are the best option to return money to shareholders. If management believes shares are overvalued, then dividends are more beneficial to shareholders.
A business can choose to reinvest excess capital into future growth opportunities as opposed to distributing it to shareholders. If management believes the investment options they have available offer greater return potential than what an individual investor could do, then management should reinvest excess capital into the business rather than distributing money to shareholders through dividends or share repurchases.
What a business cannot control is its valuation multiple. If the stock market deems a business should trade at a P/E ratio of 10, or 20, 100, then it will. Management has no control over market sentiment or the valuation ratio of its business. In the short run, valuation multiple changes skew underlying business growth. In the long run, underlying business growth is the most important factor in total return. Benjamin Graham said it best:
"In the short run the market is a voting machine, but in the long run it is a weighing machine"
In our analysis of Altria and its spin-offs, only underlying business growth and dividends will count toward total return. Returns from changes in the valuation multiple will be excluded. Underlying business growth will be measured by both earnings per share growth and revenue per share growth. Enough of the how, the results are below.
Total Return - 2008 to Present
Altria has grown at the following rates since 2008:
- Revenue per share: 5.30%
- Earnings per share: 7.42%
- Dividends per share: 8.00%
An investment in Altria in 2008 would be worth about 2x the initial investment amount, including dividends but excluding the effects of valuation changes.
Philip Morris International has grown at the following rates since 2008:
- Revenue per share: 8.63%
- Earnings per share: 7.42%
- Dividends per share: 12.54%
An investment in Philip Morris International in 2008 would be worth about 2.14x the initial investment amount, including dividends but excluding the effects of valuation changes.
Together, Kraft and Mondelez have grown at the following rates since 2008:
- Revenue per share: 1.52%
- Earnings per share: 6.67%
- Dividends per share: 2.29%
An investment in Kraft in 2008 would be worth about 1.5x the initial investment amount if shareholders held the company as well as the Mondelez spin-off that occurred in 2012. This return includes dividends but excludes the effects of valuation changes.
Philip Morris International has realized the highest annualized revenue per share growth and dividend per share growth since 2008. The company has the same earnings per share growth as Altria over the period. Kraft and Mondelez have significantly lower growth rates across all metrics than the two cigarette companies.
Opportunity for Investors
Today, investors have the opportunity to invest in domestic and international cigarette sales through Altria and Philip Morris International without investing in snack businesses. This is something that investors could not accomplish prior to 2008.
If you believe international cigarette sales will outpace domestic cigarette sales in the future, you can invest only in Philip Morris International. The series of spin-offs from the original Altria/Philip Morris company allow individual investors to allocate capital to what portion of the business they believe is the most likely to succeed.
The clear winner in terms of overall business growth of these 4 companies is Philip Morris International . It is the only one of these stocks to rank in the Top 10 based on the 8 Rules of Dividend Investing. Further, it has the second lowest P/E ratio of any of the four businesses, trailing only Kraft.
Altria has the second best growth record of the group. It is amazing that these 2 cigarette companies have managed to double shareholder return in 6 years in spite of strong headwinds from cigarette regulation and known health hazards from smoking.
The future looks much like the recent past for Altria and Philip Morris. Both businesses will continue to marginally increase prices slightly more than increases in taxes. The companies are attempting to grow through gaining market share over other cigarette businesses. Both companies have been successful in this front.
Further down the road, e-vapor and heated cigarette products will begin to contribute to Philip Morris International and Altria's bottom lines. The two companies recently signed a licensing agreement that will give Altria rights to sell Philip Morris International's upcoming heated cigarette products in the US. Philip Morris International will in turn sell Altria's e-vapor products internationally.
The licensing agreement further allows both businesses to work together on research and development for new tobacco products in the future. The licensing agreement is mutually beneficial for both companies, and makes even more sense in light of the history the companies have together.
Source: Altria Press Release
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.