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Philip Morris International versus Altria  

Back in 2008 Altria (MO) spun off its global tobacco operations in order to reduce litigation risk. The global tobacco operations are touted as a growth play on emerging markets such as China and Russia. Just because there might be an opportunity for growth, does not really mean however that this growth would materialize. Check my analysis of Altria Group (MO).

While the US is a mature market, where smoking is a habit where a continuously lower percentage of the population is engaging in, the current legislation has created an environment where it is virtually impossible for new players to enter. That way tobacco companies like Altria (MO) could raise prices almost indefinitely in an effort to combat tax increases and decline in demand. Another way that Altria is dealing with this issue is by acquiring competitors in niches it has little presence, as well as streamlining its efficiencies in order to cut costs to the bone. Excise taxes represent a very high percentage of the price of a pack of cigarettes. Thus Federal and State governments have it in their best interests not to ban the use of tobacco products.

However just because Altria is supposed to be a slow growth company and Philip Morris International (PM) is supposed to be growing its EPS at 10-12% annually, does not mean that Philip Morris International would be a better investment over the long run. Investors, who get excited about future growth, tend to bid up the prices of such assets. Risks to this strategy include failures to the realization of the future growth. Thus buying a stock at inflated valuations simply because one expects growth to continue forever might produce inferior long-term returns, relative to the slower growth asset. Philip Morris International (PM) is on my Best High Yield Dividend Stocks for 2009 list. . . .

Overall I am bullish on both stocks, but I do not have a preference for either one of them. While the past 5 years have been great for Philip Morris International, negative legislation could tamper growth in the future. I do like the economics of tobacco businesses, as it costs very little to make cigarettes, which are then sold at much higher prices to the consumer. The product is addictive but there's also an incredible loyalty to brands like Marlboro.

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