Better Buy: Altria Group vs. Anheuser Busch Inbev
Two of the
biggest sin stocks have almost as many similarities as differences.
Rich Duprey
Aug 26, 2018 at 2:54PM
Alcohol and
tobacco are arguably two of the biggest categories in a so-called sin stock
portfolio, and Altria (NYSE:MO) and Anheuser-Busch
InBev (NYSE:BUD) are each dominant competitors
in the U.S. market for their peccadillos.
Despite servicing
different vices, the two companies have a lot in common, and though their
stocks don't walk in lockstep, shares of both have fallen by 10% over the last
three years. Yet as each also sports a healthy dividend yield, Altria and
Anheuser-Busch have been favorites of income-seeking investors.
Let's take a look
at some metrics to determine which is the better buy, or whether investors
should buy both -- or neither.
Paying investors
for their troubles
As mentioned, both
Altria and Anheuser-Busch pay shareholders a rich dividend, with the former
currently yielding 4.8% and the latter 5%. Although their businesses have
substantially changed over the years through spinoffs and acquisitions, making
the Altria and Anheuser-Busch of today different companies than they were a
decade ago, both have been stalwart dividend-payers for years.
Both companies
have steadily increased their payouts in recent years, with Anheuser-Busch's
generosity exceeding that of Altria's: In the last five years, the brewer's dividend
has tripled, while the tobacco giant's has risen 66%.
MO DIVIDEND DATA BY YCHARTS.
Yet there are some
legitimate concerns about whether Anheuser-Busch can keep up that pace because
it has taken on so much debt to finance acquisitions, not least of which was
last year's $100 billion purchase of SABMiller. While it's paying down its
obligations, the company admits that at least in the short term, growth won't
be nearly as generous because it needs to focus on deleveraging.
Growth prospects
Both Altria and
Anheuser-Busch are suffering as their respective industries contract around
them. The cigarette industry has long witnessed the secular decline of
traditional cigarette smoking, and though it's counting on the technology of
electronic cigarettes to revive flagging sales, this new revenue stream isn't
significant enough yet to offset the revenues lost from combustible cigarettes.
Although Altria
has its own e-cigs on the market, it is biding its time waiting for Philip
Morris International (NYSE:PM) to receive FDA approval to begin
marketing its iQOS "heat-not-burn" device, which will be sold under
the Marlboro brand. With renewed attention being paid to the potential risks
found in e-cigs, as well as the number of youths attracted to them, even
if approval is granted, new technology may not result in the kinds of gains
originally hoped for.
The mass beer
industry has also seen an ebb and flow for years, but as of late, it is
succumbing to changing consumer tastes as drinkers either switch to smaller,
more local craft beers or begin experimenting with wine and spirits like
whiskey and tequila.
Anheuser-Busch is
hoping to capture some of the craft beer industry's spark by having bought out
nearly a dozen craft brewers over the past couple of years, but like the
broader industry, the larger craft brewers are seeing volumes
decline while the smallest continue to report record growth. Anheuser-Busch is
doing better internationally, but the U.S. remains its prime market, and sales
continue to sag.
IMAGE SOURCE: GETTY IMAGES.
Valuing declining
businesses
Certainly on the
surface, Altria seems to be a better bet since it trades at just 15 times
trailing earnings, and 13 times next year's estimates, while Anheuser-Busch
sports earnings multiples of 25 times and 19 times, respectively.
Yet the
acquisition of SABMiller has thrown the valuations of both companies a curve
since Altria recorded a large capital gain from its sale of the brewer's stock
that helped to lower its price-to-earnings ratio. The brewer, on the other
hand, incurred some substantial acquisition expenses. Moreover, Altria still
owns a near-10% stake in Anheuser-Busch related to that transaction, which
gives investors something of a two-for-one when they buy shares of the tobacco
company.
The verdict
As can be seen,
these two companies exhibit almost as many similarities as differences, and
Altria's ownership of Anheuser-Busch stock enmeshes them even more.
Still, I'd have to
say the evidence leans more in Altria's favor since it has potential for
further growth through electronic cigarettes, while Anheuser-Busch can only
pull the growth lever by making more acquisitions, which can be a risky pursuit
given its current debt levels.
Because of the
limitations the brewer is facing in craft beer, Anheuser-Busch is running
second to Altria, and since you also get a sip of the brewer when you buy the
cigarette giant, Altria becomes the better buy.