Forget Coca-Cola, Altria Group Is a Better Dividend Stock
Coca-Cola (NYSE: KO) and Altria (NYSE: MO) are two of the most well-known stocks in the consumer staples sector. Coca-Cola is one of the world's top beverage makers, and Altria's flagship Marlboro cigarettes make it the biggest tobacco company in America. But take a closer look at both companies and it becomes clear that Altria is actually the superior dividend stock, for four simple reasons.
1. A higher yield
Coca-Cola currently pays a forward yield of 3.3%. It's raised that dividend annually for over five decades. But Altria pays a higher yield of 3.7%, and it's hiked that payout every year since it spun off its overseas business as Philip Morris International in 2008.
2. Lower payout ratios
However, investors should always look beyond the yield and check the payout ratios -- the percentage of a company's earnings or free cash flow (FCF) that it spends on dividends -- to understand how sustainable the dividend is. If either percentage exceeds 100%, the dividend could be in trouble.
Over the past 12 months, Coca-Cola spent 136% of its earnings and 101% of its FCF on dividends. Altria spent 30% of its earnings and 112% of its FCF on dividends during that same period. Altria's high cash payout ratio isn't ideal, but at least the dividend is comfortably supported by its earnings.
3. Stronger revenue and earnings growth
Coca-Cola's payout ratios hit multi-year highs because its growth has been abysmal. Last year, its revenue slid 5% and its earnings fell 10%, due to weak soda sales, currency impacts, refranchising charges at its bottling operations, and other charges. Analysts expect Coca-Cola's revenue to fall 16% this year, and for its earnings -- lifted by buybacks -- to stay roughly flat.
Altria's revenues net excise taxes rose 3% last year. Its earnings, inflated by AB InBev's acquisition of SABMiller (which Altria held a major stake in), lifted its reported earnings by 173%. On an adjusted basis, which excludes that impact, its earnings rose 8%. Wall Street expects Altria's revenue and earnings to respectively rise 1% and 9% this year.
Altria consistently grows its earnings amid declining smoking rates by raising cigarette prices, cutting costs, and repurchasing stock. Its smaller businesses -- Black & Mild cigars, Copenhagen and Skoal snuff, Chateau St. Michelle wines, and Mark Ten e-cigarettes -- further soften the blow.
Meanwhile, Coca-Cola has struggled. As soda consumption dropped, the company diversified its portfolio with non-carbonated drinks like bottled water, tea, juice, and coffee. However, many of its rivals -- such as PepsiCo -- pursued similar strategies and saturated the market.
Unlike PepsiCo, Coca-Cola doesn't have a portfolio of packaged foods to offset its weak beverage sales. And unlike Altria, Coca-Cola lacks the ability to significantly hike its prices without impacting market demand.
4. Lower valuations
Low interest rates over the past few years made blue-chip dividend stocks like Coca-Cola and Altria popular among yield-starved investors. But with interest rates now rising, bonds will eventually become more attractive than stocks -- which could cause big sell-offs in dividend stocks with higher valuations.
Coca-Cola fits that bill, with a trailing P/E of 44 (versus the industry average of 31 for soft drink makers) and a forward P/E of 23. Altria has a much lower P/E of 9 (versus the industry average of 14 for tobacco companies), but that P/E was distorted by the aforementioned SABMiller deal. However, Altria's forward P/E of 20 still looks more reasonable than Coca-Cola's multiples.
The key takeaways
Coca-Cola and Altria are both still low-risk income plays. Coca-Cola probably won't slash its dividend and lose its "dividend aristocrat" title, but its annual hikes will likely shrink as it figures out how to grow its earnings and free cash flow again.
Altria's growth is also finite -- since price hikes, cost cuts, and buybacks can't offset declining domestic smoking rates forever -- but I think it should be a better income play than Coca-Cola over the next decade.
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Leo Sun has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Anheuser-Busch InBev NV. The Motley Fool has a disclosure policy.