Altria vs. Philip Morris: what is the best buy?

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Introduction

Altria Group Inc. (NYSE: MO) shares fell 9.2% on June 23 after the Wall Street Journal reported that the Food and Drug Administration (FDA) has banned all Juul Labs vaping products from the US market in a a widely anticipated move that one could say had already been discounted into MO shares.

MO paid $13 billion in 2018 for a one-third stake in Juul. Altria has already written everything except $1.7 billion of its initial investment in Juul. With a formal ban on vaping products, it was a blow to MO stocks.

The FDA has the authority to regulate nicotine as an addictive drug. As such, nicotine vaping products have had to file PMTA (Premarket Tobacco Product Approval) applications to keep their products on the market. The The FDA said that Juul’s apps had insufficient toxicological data on its e-liquid pods that contain consumable nicotine.

Juul said it would seek a reprieve from the FDA ban and consider appeals. The company’s products will apparently remain on the market during the appeal process.

Below is the lengthy process that MO faces when working through the FDA process.

Altria - Regulatory Update - FDA Rulemaking Process

Alteria.com

Philip Morris International (NYSE:PM) and MO have generally been strong defensive plays during recessions. MO and PM pay high and generally sustainable dividend yields and can be considered in a well-balanced portfolio.

Story

PM was an operating company of MO until a spin-off in March 2008. This was widely seen as a way for PM to have more freedom from rules and standards than a US-based company could potentially have regarding potential litigation and legislative restrictions. MO also seemed to see the fallout as an easier way to pursue sales growth in emerging markets. PM’s operational headquarters are in Lausanne, Switzerland. To confuse things a bit, MO is the parent company of Philip Morris USA which is the producer of Marlboro cigarettes.

Philip Morris

PMI.com

Overview of prospects

Like MO, PM manufactures and sells cigarettes, other nicotine-containing products and smokeless vaping products as well as related electronic devices and accessories.

The pandemic has brought about many lifestyle changes and different kinds of stresses that have boosted tobacco sales. As a first in 20 years, cigarette sales increased in 2020 according to a report by the Federal Trade Commission. Its annual cigarette report shows that manufacturers sold 203.7 billion cigarettes in 2020, an increase of 0.4% from 202.9 billion in 2019. The report does not include e-cigarette sales.

By the way, marketing has grown from $7.62 billion in 2019 to $7.84 billion in 2020, with the bulk of rebate spending going to cigarette retailers and wholesalers.

Strict FDA regulations and plans to force nicotine cuts in cigarettes prompted MO and PM to develop smoke-free products. Apparently even The PM has decided to go smoke-free with their new products, as shown below.

Philip Morris IQOS VEEV

PMI.com

Source: PMI.com

Both companies are generally well positioned to perform well in a recession, especially if the future looks like the past. The U.S. tobacco market is expected to grow at a pace 3.4% CAGR to reach $102.70 billion by 2030.

US tobacco market

grandviewresearch.com

Which of these stocks is a better choice now? Keep reading.

What is Juul’s value to Altria?

While MO’s stock price reaction seemed overdone, it was the result of Juul’s withdrawal of MO’s earnings and the possibility that the company had put the remaining Juul investment on its books.

MO owns more than 42% of the US cigarette market by volume and industry profits, which appear to be driven primarily by the Marlboro retail product. With or without Juul, MO seems well positioned to weather this storm. However, the increased regulatory pressures mentioned here will be a headwind for MO. Getting new acceptable e-vapor products could take years to develop.

MO stimulates the growth of its On! nicotine sachets, but this does not directly concern the e-vapor market. It is unclear whether these nicotine pouches convert large numbers of cigarette smokers to On!.

Altria on the move!  volume

Altria.com

Comparison of dividend yield and other key indicators

Altria

MO stock is attractive at this price with a P/E of just over 25 and a dividend yield of 8.7%. The stock has fallen from a 52 week high at 57 and is now in the 42 price range. labor and products. Cigarettes, particularly Marlboro, remain MO’s core business and cash cow.

MO also has a 45% of capital to Kronos (CRON). The direction of federal legalization of marijuana in the United States could present major value creation and appreciation for MO shares.

Philip Morris International

PM stock has a P/E of just over 17 and a dividend yield of 5.04%. The stock declined from a 52-week high at 112 and is now in the 101 price range. PM stock was not as affected as MO.

The main advantage that PM has over MO is that it has global reach without the influence of the US government.

Altria performance against Philip Morris

Fidelity.com

Conclusion: Which is a better buy – MO or PM

Altria shares fell 9.2% after the FDA ban on Juul products and now have a dividend yield of 8.7% and a P/E of 25. While PM has a dividend yield of 5 % and a P/E of 17.

With the headwinds both companies are facing on inflation, we think both stocks could be under pressure.

However, both should continue to pay their dividends and weather the next inflationary and recessionary environments.

We believe investors have overreacted and driven MO price down into an oversold range and expect a technical gap to close down to the 47-50 price; however, it highly depends on the general direction of the stock market.

We don’t expect much appreciation by the PM.

To preserve capital, we are considering either selling a naked put on MO and PM or a defined risk play of a bullish 45-day put spread.

For example, one could buy MO here and hope for a car ride and that might not be a bad idea. However, 100 shares will cost you over $7,400 and you will get that juicy dividend. As an alternative, one could sell an August 40 put for $116 (at current prices) with a delta of 30 and a profit probability of 67%. If the stock stays above 40, you keep 100% of the premium you collected at expiration. On the other hand, if the stock goes below 40, the stock will most likely put you at 40, with a raise of $1.16 your basis is below 38 – creating a dividend yield of about 9%.

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