By Bob Ciura
Altria (MO) and Brown-Forman (BF.B) are both manufacturers of vice products, and both have impressive dividend growth histories.
Brown-Forman has increased its dividend for 34 years in a row. It is a Dividend Aristocrat, an exclusive group of 51 high-quality stocks with 25+ consecutive years of dividend growth. You can see all 51 Dividend Aristocrats here.
Meanwhile, Altria is a Dividend Achiever, a group of stocks with 10+ consecutive years of dividend increases. You can see the entire list of all 264 Dividend Achievers here.
Altria is not officially a Dividend Aristocrat, because its various spin-offs over the years technically reduced its dividend payout at times. But the company has increased its dividend 51 times in the past 48 years, which is a highly impressive track record.
If an investor were attempting to pick between them, which dividend-paying vice stock is the better buy today?
Business Overview
Winner: Toss-Up
Both Altria and Brown-Forman have very strong business models. They are both part of a group of companies, commonly referred to as ‘sin’ stocks. These are companies in the alcohol and tobacco industries. They sell vice products, that are generally viewed as detrimental to one’s health. At the same time, these are some of the shareholder-friendly businesses in existence.
Altria is a tobacco giant. It sells the Marlboro cigarette brand in the U.S., and it has a number of other businesses, such as smokeless tobacco, cigars, and wine. Its other brands include Skoal, Copenhagen, Black & Mild, and Ste. Michelle. Altria also has a 10% ownership stake in global beer giant Anheuser Busch Inbev (BUD).
Marlboro is the flagship of Altria’s fleet. Marlboro captures nearly half of all U.S. retail cigarette market share.
Source: 2017 CAGNY Presentation, page 42
Brown-Forman manufactures alcoholic beverages. It has a large product portfolio, which is focused on whiskey, vodka, and tequila. Its most famous brand is its flagship Jack Daniel’s. Other popular brands include Herradura, Woodford Reserve, El Jimador, and Finlandia.
Brown-Forman is highly profitable. It generates high returns on capital, and has significantly expanded operating margins over the past 10 years.
Source: Annual Stockholder Meeting, page 11
Altria and Brown-Forman are both cash cows. They generate high levels of free cash flow, thanks to their economies of scale, and strong brands. They sell products with steady demand, even during recessions, and can raise prices each year. This results in sustained earnings growth, which in turn gives them the ability to increase dividends each year.
Growth Prospects
Winner: Brown-Forman
When it comes to future growth, Brown-Forman could have two significant advantages over Altria. First, the growth outlook for alcoholic beverages is far more favorable than it is for tobacco products in the U.S. The major challenge for Altria is declining smoking rates.
Altria’s domestic cigarette shipment volume declined by 4% over the first half of 2017. This caused adjusted earnings growth to slow, to just 3.3% in that period. To reignite growth, Altria is working on “reduced-risk” products, which include e-vapor and e-cigarettes. These products heat tobacco, rather than burn it. According to Altria, this produces fewer harmful health effects.
Source: Investor Day Presentation, page 114
Altria is making significant progress in these areas. Last quarter, e-vapor shipment volumes grew over 50%. And, the company has submitted product applications for its next-generation IQOS line to the FDA, and is preparing to launch IQOS at some point over the next year.
Still, Brown-Forman is seeing much stronger growth in the U.S, particularly from bourbon and tequila. For example, the company generated double-digit sales growth from Woodford Reserve and Old Forester over the first half of 2017. Its tequila brands Herradura and el Jimador tequila also grew sales by double-digits, in the U.S.
Brown-Forman could continue generating higher growth, because it has a heavy presence in the emerging markets, while Altria generates 100% of its revenue from the U.S. Brown-Forman’s emerging-market sales increased 15% over the first half of the year.
Source: Q2 Earnings Presentation, page 7
For fiscal 2018, Brown-Forman expects sales growth of 6% to 7%. Earnings-per-share are expected to increase 11% to 16%, to a range of $1.90 to $1.98. Meanwhile, Altria expects full-year earnings growth of 7.5% to 9.5%, to a range of $3.26 to $3.32.
Valuation & Dividends
Winner: Altria
Brown-Forman has an advantage when it comes to future growth potential, but investors have to pay a much higher price for that growth. Brown-Forman trades for a price-to-earnings ratio above 36.Its valuation has expanded considerably over the past few years.
For its part, Altria stock trades for a price-to-earnings ratio of 21.7. Meanwhile, the S&P 500 Index has an average price-to-earnings ratio of 25.5.
Both stocks are trading above their average valuations, but Brown-Forman"s overvaluation is more severe. According to ValueLine, in the past 10 years, Brown-Forman held an average price-to-earnings ratio of 22.7. In the past 10 years, Altria held an average price-to-earnings ratio of 15.7. While it is far from cheap, Altria still has a much lower valuation than Brown-Forman.
Brown-Forman appears to be significantly overvalued, both in relation to the broader market, as well as when compared to its own historical average. If Brown-Forman’s price-to-earnings multiple contracted from its lofty levels, it would significantly impact future returns.
Plus, Altria is much more attractive as a dividend stock.
Altria’s dividend yield is more than three times Brown-Forman’s. They are both strong dividend growth companies, but Altria’s superior dividend yield gives it a huge advantage for income investors.
Final Thoughts
Altria and Brown-Forman are both highly profitable consumer goods companies, with strong brands and reliable dividends. Both companies are on our list of 350 dividend-paying stocks in the consumer staples sector. You can see the full list of all 350 consumer staples dividend stocks here.
Brown-Forman is the better growth pick. The environment is more favorable for alcohol than tobacco, in the U.S. This should result in stronger earnings growth for Brown-Forman going forward. However, Altria has a significantly higher dividend yield, and a lower valuation. That makes Altria the better pick for value and income investors.
Brown-Forman is a Dividend Aristocrat, but it isn’t undervalued right now. There are cheaper Dividend Aristocrats out there. Find them with our service Undervalued Aristocrats, which provides actionable buy and sell recommendations on some of the most undervalued dividend growth stocks around. Click here to learn more.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
No comments:
Post a Comment