Let us make something clear at the outset: Philip Morris (PM) is our largest holding. Altria (MO) was a part of the portfolio but it gave way to more PM earlier this year. However, that does not mean all is lost for Altria or everything is rosy for PM.
PM and MO are two very popular stocks on Seeking Alpha. Together, both have about 13,000 people who follow them. After reading some of the recent comments by Seeking Alpha readers on PM vs. MO, two things are clear: i) More folks love PM over MO and ii) quite a few seem unaware of the problems that could haunt PM, believing its totally free of troubles just because it does not operate in U.S.
So, this article plays the devil's advocate and tries to present a few areas where Altria holds the edge over Philip Morris. The recent issues in Europe make it a good opportunity to sit back and evaluate if PM really is so blemish-free.
Current Yield: Let us get the obvious out of the way. Altria's current yield of 4.7% is well above Philip Morris's 3.5% Even though PM's dividend growth rate is far greater than Altria's, these two articles (Altria, Philip Morris) show it would be quite some time before PM's yield matches or overtakes MO's - assuming both grow dividends at around the same rate as the past 5 years.
Known Devil Vs. Unknown Angel: Altria's problems are very well documented: tobacco is a negative growth industry in the U.S, the company has to spend billions in lawsuits and lobbying, and it does not sell outside the U.S.
Philip Morris's problems? Well, till the Europe troubles started in late 2011, not many even thought it was possible for PM to have problems of any sorts. Why? Because it operates in so many countries outside the U.S. People assume it is only the U.S market which has got regulations and also is decreasing its tobacco consumption. Of course the old Philip Morris (now Altria) operated in the international market and knows a thing or two about the problems, but that does not make the new PM immune to any of these growth problems, as can be seen here.
Right now, it might seem like Altria has to face more legal issues, but who knows what the future holds for Philip Morris in all those developing countries. This is important because if all the possible bad news are out in public, the stock price would reflect it. What knocks down a stock hard is unexpected bad news.
Strengthening U.S Dollar: Since PM operates outside the U.S, the company is prone to currency fluctuations. This could work in favor of PM if the U.S dollar falls and work against it if the U.S dollar gains strength, as is the case now. The link shared above also quotes that the recent earnings warning is partly due to the strength in dollar. This is a common issue for a lot of material companies as well. Sure, this is more likely to be a temporary issue but the point is, investors should be aware of this.
Less Competitors: Since the U.S tobacco is seen as a negative growth industry and is also notorious for the rules and lawsuits, not many new companies come to the fray. However, PM has to compete with many more international competitors, many of whom end up being bought by the more powerful PM. Peter Lynch advocated investing in low growth industries that have a few players. His reasoning is these companies do not attract flocks of competitors, whereas a high growth industry has more players and the gains are transferred to the consumers instead.
Less Volatile: Altria's beta is less than half that of Philip Morris. Since people view Philip Morris partly as a growth stock, it gets beaten down faster during bad times. Any hint of bad news from Europe or generally on the global front is sure to affect PM more than MO. If you want steady (and reasonably growing) dividends with milder rides, Altria would be a better bet.
Debt-Equity Ratio: While we can always use one financial ratio or the other to prove a point on either side, it is striking that PM's debt/equity ratio is about 4 times that of MO's. And everyone knows even MO carries a high debt load. Sure, these companies have always operated with a high debt load and have proven to be winners, a high debt load is something investors should always keep an eye on, at least to monitor how the borrowed money is being used.
Conclusion: We still love PM and will continue holding it for a long time hopefully. While, totally acknowledging Philip Morris's strengths (higher earnings potential, lower payout ratio, dividend growth, and buybacks) we believe its important for investors to fully understand and acknowledge the potential issues they could encounter with Philip Morris. Love a stock but do not marry it.
Additional disclosure: MO will always be on the watch-list during pullbacks.