If you were lucky enough to own Altria before the 2008 split into two companies, you were rewarded with 1 share of Philip Morris International for every share of Altria you owned. If not, you are left with a decision: do you invest in the domestic operations of Altria or the international operations of PMI?
Jim Cramer of Mad Money says invest in Altria for a value play, PMI for a growth. But which stock will provide the best total return? I think it may be Altria.
Shareholder return is a combination of dividends and earnings growth. The market prices both into stocks. The ones with the best returns are not the fastest growers, but those that grow faster than expected. Investors are expecting PMI to grow like gangbusters in the emerging markets, and it may. But if that growth is priced into the stock, and it does not exceed the optimistic expectations of 10% EPS growth, its returns will lag.
Altria on the other hand, is basically DOA. Investors expect it to slowly implode as litigations costs, heavy government regulation, and decreases in the smoking population continue. This investor fear may lead to superior returns.
One day, litigation will stop. You could sue in the 1980’s and 90’s because you smoked for 40 years and “no one” told you it would cause cancer. But now we all know, and one day that argument will no longer hold water.
Government regulation will persist, but cigarette companies generate too much revenue, and the government will continue to work with them and their lobbyist.
Yes, less people smoke in the US than 50 years ago. But, with litigation worries, government red tape, and a complete ban on advertising, no one is interested in getting into the cigarette business. This means Altria has relatively few competitors in the US, and that’s not going to change. The world market is wide open, and PMI will see increased competition as these markets develop.
People have smoked for hundreds of years, and I doubt they are going to stop anytime soon. Someone has to make and sell cigarettes in the US, and Altria does it better than anyone else. No investors want to touch the stock or the industry. If that’s not contrarians investing, I don’t know what is.
Disclosure: I do not own any shares of MO or PM. You can see my holdings under the Current Portfolio Holdings tab