Best Stock to Buy Right Now: Philip Morris International vs. British American Tobacco

Best Stock to Buy Right Now: Philip Morris International vs. British American Tobacco

If you’re a dividend investor, you’ve probably considered buying tobacco stocks if you don’t already own them.

The tobacco sector has long been a breeding ground for income investors. These stocks tend to generate wide profit margins, have recession-resistant business models, and require relatively little capital or research and development spending, so they return most of their profits to investors.

Two of the largest and best known tobacco stocks in the world are Philip Morris International (NYSE:PM) And British American Tobacco (NYSE:BTI). There are good reasons to include both in any dividend stock portfolio, especially one focused on high-yielding stocks. But if you had to choose between the two, which is the better buy today?

Let’s take a look at the current situation of these two tobacco titans.

Best Stock to Buy Right Now: Philip Morris International vs. British American Tobacco

Image source: Getty Images.

Business model: Philip Morris International versus British American Tobacco

As tobacco stocks, both companies have similar business models, but the tobacco industry is about more than just cigarettes. The industry is moving beyond combustibles to products like vapes and oral nicotine pouches that claim to be less harmful, and Philip Morris and British American Tobacco (BAT) have emerged as leaders in this transition.

Philip Morris is known for selling Marlboro and other cigarette brands in international markets, while its combustion-free product, IQOS, leads its efforts towards a smoke-free environment. IQOS uses real tobacco rather than the liquid common in e-cigarettes. In 2023, smoke-free products generated 36.5% of the company’s revenue and a higher percentage of its gross profits.

Historically, Philip Morris has operated outside the United States only as part of the company’s spinoff from Altria in 2007. However, it has just purchased the rights to sell IQOS in the United States from Altria for $2.7 billion, indicating that the company is optimistic about the product. Zyn, a branded oral nicotine pouch acquired in the Swedish Match acquisition, has also seen strong growth.

British American Tobacco, which sells its products worldwide, is known for cigarette brands like Camel, Newport and Lucky Strike, some of which it acquired in its merger nearly a decade ago with RJ Reynolds. The company recently wrote down the value of its U.S. cigarette business by $31 billion, showing it likely overpaid for the acquisition and is focused on transitioning to smoke-free products. .

In 2023, organic revenue increased 21%, driven by growth in vape brand Vuse and oral nicotine pouch Velo, and reached profitability two years ahead of BAT’s initial target. New categories accounted for 12% of its revenue, and this share is expected to continue growing, given its revenue growth rate of 21% in 2023.

Financial data: Philip Morris International vs. British American Tobacco

Philip reported strong growth in the first quarter, with organic revenue up 11% to $8.8 billion and overall shipment volume growth up 3.6% to 180.5 billion units. . Cigarette shipments fell only 0.4%, to 143.2 million, and the company saw strong growth in smoke-free products. Heated tobacco units increased 20.9% to 33.1 billion, and smokeless oral products increased 35.8% to 4.2 billion.

Ultimately, the company’s margin increased, with organic gross margin increasing 13.7% to $5.6 billion, while organic operating profit jumped 22.2% to 2 billions of dollars.

As a UK company, British American Tobacco does not publish quarterly results, but we can make comparisons with its 2023 performance.

On an adjusted organic basis, BAT’s revenue increased 3.1% to 27.3 British pounds ($34.02) and adjusted operating profit increased 3.9% to 12.5 million pounds ($15.5 million), achieving an operating margin of 45.7%. Organic revenue from new categories increased 21% to £3.34 ($4.16). About half of this activity comes from vapor, with the rest coming from heated products and oral nicotine pouches.

Here, the advantage goes to Philip Morris because it is growing faster, leading to higher margins, and has made more progress on next-generation products.

Dividend and valuation: Philip Morris International versus British American Tobacco

On metrics such as dividend yield and valuation, British American Tobacco has the edge. BAT trades at a yield of 9.5% and has a price/earnings assessment by only 6.7. Philip Morris, on the other hand, offers a 5% dividend yield and currently trades at a price-to-earnings ratio of 16.9.

British American Tobacco is clearly much cheaper than Philip Morris and offers a dividend yield almost double that of Philip Morris.

Past Performance: Philip Morris International vs. British American Tobacco

Finally, it is worth considering how both stocks have performed in the recent past, as rising stocks tend to continue to rise and falling stocks may struggle to rebound.

As you can see from the chart below, Philip Morris has a clear advantage in price appreciation and total return.

PM ChartPM Chart

What is the best buy?

Dividend investors may prefer to buy British American Tobacco shares due to their high yield and cheaper valuation, but overall, Philip Morris seems like the better stock to own. The company is performing well across its business, outperforming the competition and is well ahead of its peers in the transition to smoke-free products.

Philip Morris seems like a good bet to outperform BAT, even with the dividend gap.

Should you invest $1,000 in Philip Morris International right now?

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool recommends British American Tobacco Plc and Philip Morris International and recommends the following options: long January 2026 $40 calls on British American Tobacco and short January 2026 $40 calls on British American Tobacco. The Mad Motley has a disclosure policy.

Best Stock to Buy Right Now: Philip Morris International vs. British American Tobacco was originally published by The Motley Fool

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