Stock Wars: Altria Group Vs. Philip Morris International

Benzinga’s weekly Stock Wars matches up two leaders in a major industry sector, with the goal of allowing readers to decide which company is the better investment. This week, the duel is between two tobacco industry titans: Altria Group Inc. MO and Philip Morris International Inc. PM.

A Common History: This week’s Stock War duelists share a common history that traces back to Philip Morris, an English retailer who opened a London shop in 1847 that sold cigarettes and tobacco. Morris’ son Leopold teamed with Joseph Grunebaum to create Philip Morris & Company and Grunebaum Ltd with Joseph Grunebaum in 1881, which shortened its name to the less unwieldy Philip Morris & Co. Ltd. in 1885.

(Philip Morris in a daguerreotype from the 1860s.)

In 1902, the company was incorporated in New York City, only to be acquired in 1919 and renamed as Philip Morris & Co. Ltd., Inc. An Australian affiliate was added in 1954, and in 1987 Philip Morris International became the operating company of Philip Morris Companies Inc., which changed its name in 2003 to Altria Group. Philip Morris International was spun off from Altria in 2008, which operates Philip Morris USA as a subsidiary.

Jacek Olczak, CEO of Philip Morris International, has freely admitted the companies’ history is confusing.

“We got divorced, but we forgot to change our names,” he joked.

The Case For Altria Group: Over the past 12 months, Altria Group has sought to position itself as a holistic company cognizant of diversity and environmental concerns.

To highlight these considerations, the company announced a $5 million donation to nonprofits dedicated to advancing social and economic equity, as well as the approval of its greenhouse gas emissions reduction targets by the Science Based Targets initiative. The company also received a score of 100 on the Human Rights Campaign Foundation’s 2021 Corporate Equality Index and it appointed former Canadian Pacific Ltd. executive Kathryn B. McQuade as independent chairwoman of the board.

However, a great deal of recent media attention has focused on Altria’s legal woes. As of this writing, the company is on trial after being sued by the U.S. Federal Trade Commission for violating antitrust laws for dropping its e-cigarette business before spending $12.8 billion to acquire a 35% stake in Juul Labs Inc. Altria claimed it acquired a stake in Juul based on its failure to create a satisfactory vaping product. (The company has stated the fair value of its JUUL investment is now $1.5 billion.)

Juul has also become something of litigation albatross for Altria. On June 28, Juul reached a $40 million settlement with the State of North Carolina to resolve charges that its marketing was responsible for rising rates of e-cigarette addiction among young people.

Thirty-eight other states have their own investigations into Juul, and settlements with those entities are not hard to imagine. The U.S. Food and Drug Administration has its own probe into Juul, too.

However, Altria is hardly on the ropes. The company manufactures nearly half of all cigarettes sold in the U.S., along with the popular smokeless tobacco products sold under the Copenhagen and Skoal labels, and it is a stakeholder in Anheuser-Busch InBev SA BUD and the Canadian cannabis company Cronos Group Inc CRON. The company is also pushing the IQOS 3 and Marlboro HeatSticks heated tobacco devices and the on! tobacco leaf-free nicotine patches.

In its first-quarter earnings report published in April, Altria reported $6 billion in net revenue, down from $6.3 billion one year earlier. Its first-quarter gross profit saw a 13.9% year-over-year rise to $3.2 billion from $2.8 billion, and its operating income was up 12.24% to $2.6 billion from $2.3 billion.

Altria also reported paying Altria paid $1.6 billion in dividends during the first quarter, with its current annualized dividend rate is at $3.44 per share. The company also Altria repurchased 6.9 million shares at an average price of $47.02 during the quarter, for a total cost of $325 million.

“We are off to a strong start to the year and believe our businesses are on track to deliver against full-year plans,” said CEO Billy Gifford. “Against a challenging comparison, our tobacco businesses performed well in the first quarter and we continued to make progress advancing our non-combustible portfolio.”

Altria Group trades around $46.78, closer to its 52-week high of $52.59 than to its 52-week low of $35.83.

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The Case For Philip Morris International: PMI does not face the legal difficulties facing Altria Group in the U.S., if only because its products are not sold in the U.S. — it has retail in 180 countries. And considering that the bulk of today’s smokers are not based in the U.S. — 46% of the world’s smokers are found spread across China, India and Indonesia — the lack of a domestic presence has not hurt the company.

For the most part, PMI kept a relatively low U.S. profile this year until the June 22 announcement that it was moving its corporate headquarters from New York City to Stamford, Connecticut. While Gov. Ned Lamont heralded the arrival of 200 new jobs into a state where the 7.7% unemployment rate is above the 5.8% national rate, the company’s track record for creating health problems was also raised by a leading anti-smoking group.

"With the tobacco industry taking up residence in Connecticut, it’s time for lawmakers to recommit to protecting our kids, communities of color and other groups targeted by Big Tobacco from deadly tobacco addiction,” Amber Herting, a spokeswoman for the American Cancer Society’s political action committee, said in a release.

As with Altria Group, the company has sought to position itself as a corporate good citizen. It recently launched a public education initiative entitled United to Safeguard America from Illegal Trade to combat U.S. commerce in black market tobacco products.

The company has also been highlighting a renewed focus on smoke-free products, with the goal of having 50% of net revenues generated by smoke-free products by 2025.

“Despite the fact that, yes, we are a Big Tobacco company, we said that our objective is to get rid of cigarettes and replace them with the better alternatives for those people who otherwise would continue to smoke,” said Olczak during a press conference announcing the new Connecticut headquarters.

In its first-quarter earnings report published in April, PMI reported net revenues of $7.5 billion, up from $7.1 billion one year earlier. Operating income totaled $3.4 billion, up from $2.7 billion in the previous year.

The company reported diluted earnings per share of $1.55, up by 32.5%, and adjusted diluted EPS of $1.57.

With its earnings report, the company declared a regular quarterly dividend of $1.20 per common share, payable on July 12. The company followed up on the earnings report by authorizing a new share repurchase program with target spending of $5 to $7 billion over a three-year period starting after its second-quarter earnings call.

Philip Morris International trades around $97.94, just under its 52-week high of $100.95 and far from its 52-week low of $68.93.

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The Verdict: Despite vigorous efforts by public health safety experts to warn people away from tobacco and e-cigarette products, both Atria Group and PMI show no signs of going out of business — it’s quite the opposite.

Altria Group is burdened by Juul’s legal problems, but its investments elsewhere serve to balance whatever multi-million-dollar settlements Juul is going to rack up in the second half of 2021.

The drop in first-quarter revenue is not in the company’s favor, but it could generate more invigorating earnings reports if it can widen the U.S. market for smoke-free tobacco products.

PMI does not have Altria Group’s headaches — and, quite frankly, its stock is healthier. If it continues at its current rate, it could easily end the year higher than its current 52-week peak.

Thus, Philip Morris International is the winning stock in this week’s Stock War duel.

(Photo: Succo / Pixabay.)