How Do Philip Morris and Altria Compare in 2020?

So far this year, Philip Morris International (NYSE:PM) and Altria Group (NYSE:MO) have underperformed the broader equity markets. Philip Morris and Altria Group have lost 12.8% and 19.4% of their respective stock values this year. Meanwhile, the S&P 500 Index has only corrected 3.3% during the same period.

Although Philip Morris reported better-than-expected first-quarter earnings, it didn’t keep up the pace with the broader equity market. The company’s stock price fell due to investors’ fear of a decline in the company’s sales amid a fall in duty-free business, a slowdown in the expansion of IQOS in the US amid the COVID-19 outbreak, and delay in implementing a new minimum price by the Indonesian government. Altria also reported better-than-expected first-quarter earnings. However, the company’s investment in JUUL and Cronos Group (NASDAQ:CRON) has been a headwind on the stock. Due to JUUL’s rising legal issues, Altria had to write-down its investment in the company twice.

Amid the outbreak, analysts expect Philip Morris’s EPS to fall this year. They expect the company to post an adjusted EPS of $4.87 in 2020 and $5.36 in 2021. These expectations represent a YoY decline of 6.1% in 2020 and a growth of 10.1% in 2021. Currently, Philip Morris trades at 15.2x analysts’ 2020 EPS expectation and at 13.8x analysts’ 2021 EPS expectations. I think that the company’s valuation multiple looks attractive given the defensive nature of its business.

Analysts expect Altria to report an adjusted EPS of $4.25 in 2020 and $4.50 in 2021. These expectations represent a YoY rise of 0.6% in 2020 and 6.0% in 2021. Currently, the company is trading at a 9.5x analysts 2020 EPS expectations and at 8.9x their 2021 EPS expectations. The steep fall in the company’s stock price has dragged its valuation multiple. Altria’s valuation multiple looks very attractive at these levels.

Philip Morris has increased its dividends every year since it went public in 2008. The company’s board has increased its dividends at a CAGR of 8.9%. The company has a strong operating cash flow. So, we can expect the company to continue increasing its dividend payouts. On March 5, Philip Morris announced quarterly dividends of $1.17 per share at an annualized payout rate of $4.68 per share. As of June 3, the company’s dividend yield was 6.31%.

Altria is a dividend aristocrat. The company has raised its dividends 54 times in the past 50 years. The company always seeks to payout more than 80% of its earnings as dividends. From 2015 to 2019, the company paid nearly $25 billion in dividends. Altira increased its dividends at a CAGR of 9.8% during this period. On May 14, Altria declared a quarterly dividend of $0.84 per share at an annualized payout rate of $3.36. The dividend will be paid on July 10 to shareholders recorded as of June 15. As of June 3, the company’s dividend yield was 8.4% with its stock price trading at $40.21. At the end of the first quarter, Altria’s cash and cash equivalents stood at $5.62 billion. Also, the company has a strong operating cash flow. So, we can expect Altria to pay dividends at the same rate.

Wall Street is bullish on Philip Morris. Among the 17 analysts, 76.5% recommend a “buy,” while 23.5% recommend a “hold.” None of the analysts recommend a “sell.” As of June 3, analysts’ consensus target price was $83.47, which represents a 12-month return potential of 12.5%.

Analysts are also bullish on Altria. Among the 15 analysts, 66.7% recommend a “buy,” while 33.3% recommend a “hold.” None of the analysts recommend a “sell.” As of June 3, analysts’ consensus target price was $47.93, which represents a return potential of 19.2%.

I’m bullish on both of the stocks due to their underperformance amid the recent rally in broader equity markets. Both of the companies’ dividend yields look attractive and should attract income-seeking investors. Currently, Altria is trading at a very attractive valuation multiple. Given their strong balance sheet and operating cash flows, I think that investors should accumulate both of the stocks on dips.