If you are looking at cigarette makers, you have probably been attracted by Altria's (NYSE: MO) ultra-high 7.7% yield and British American Tobacco's (NYSE: BTI) even more generous 8.4%. Although Philip Morris International(NYSE: PM) doesn't have nearly as high a yield, at "just" 4.5%, it is probably a better all-around option in the tobacco space.
Here are three key reasons why.
1. Philip Morris International is managing its cigarettes better than its peers
The big problem with tobacco companies is that cigarette volumes have been heading lower for years. Altria's volume fell 11.5% in the first six months of 2024, while British American Tobacco's decline was 12.5% in the first half of the year. These are not good numbers, but neither are they unusual. This has been an ongoing decline.
In comparison, Philip Morris International's volume decline was negative by just 0.4% in the first quarter of 2024, and volume actually increased by 0.4% in the second quarter. That's basically flat volume for the first half of the year versus its peers, which are facing material volume declines.
To be fair, a big part of this is the fact that Philip Morris International doesn't have any exposure to the U.S. cigarette market, which appears to be in terminal decline. However, this lack of exposure is by design, given that it was spun out of Altria to own that company's non-U.S. business. This has proven to be a huge plus for Philip Morris International in more ways than one.
2. Philip Morris is entering the U.S. market without constraints
All three of the major cigarette companies are attempting to shift their businesses away from cigarettes. It appears that Philip Morris International has more time to adjust its operations, given the slower volume declines (and even growth) it has seen, at least partly thanks to its exclusive foreign focus. However, that doesn't mean that Philip Morris International can't invest in the U.S. market at all. It just has to do so via non-cigarette businesses. And that's exactly what it has done, meaning that Altria essentially created a new competitor in the one market and product category where it most needs to succeed right now.
Nicotine pouches are where Philip Morris International is seeing the most success. Thanks to its Zyn brand, volume in this business rose a huge 50% in the first half of 2024. There are a couple of notable takeaways from the earnings release, including Zyn's 50% growth in the U.S. market, 50% growth outside the U.S. market, and the fact that Zyn is entering new markets, which will help spur longer-term growth. This is a key product that appears to be increasingly in demand -- to the point where Philip Morris International had trouble supplying all the demand it was seeing in the United States.
Without the overhang of a flagging U.S. cigarette business, Philip Morris International appears to have a clean slate that it is exploiting to its advantage in this key global nicotine market.
3. Philip Morris International is doing a better job executing on big changes
This leads to the big issue for all three of the cigarette makers: Moving away from cigarettes. Altria has actually made a couple of big moves on this front, two of which (Juul and marijuana) have basically been complete failures that resulted in billions of dollars' worth of write-offs.
Altria has tried again with its acquisition of NJOY, which is further along in its development than Juul and may turn out better (volume was up nearly 15% sequentially for the product in the second quarter). However, when you add the poor investment decisions to the divestiture of Philip Morris International, it seems reasonable to wonder if Altria's management team has what it takes to turn the business around.
British American Tobacco hasn't stumbled as badly as Altria. In fact, it has seen some notable success. For example, smokeless products now make up nearly 18% of the company's revenues, and the division was profitable at the category level in the first half of the year. The long-term goal is to materially increase that number, but the company is making clear near-term progress.
Meanwhile, Philip Morris International's smoke-free businesses now account for nearly 40% of its top line. To be fair, a huge portion of that is related to the Zyn product, a business that was acquired in late 2022. The Zyn product's success, however, is in stark contrast to the ongoing missteps at Altria, and it has given Philip Morris a leg up on British American Tobacco, as well. In a competitive market, Philip Morris International looks like it is executing better than its peers from a strategic standpoint.
A lower yield, but better results
While both Altria and British American Tobacco offer high dividend yields, neither of those companies is executing as well as Philip Morris International. In a sector that is facing material headwinds, notably declining cigarette demand, betting on companies that are struggling to execute is a high-risk decision. Basically, if things don't go as hoped, the dividends could get cut at some point in the future. Lower-yielding Philip Morris International is simply a standout on the positive side when it comes to executing across multiple portions of its business.
Most investors should probably avoid the cigarette space. But if you feel compelled to invest in the area, sticking with the best-performing company probably makes the most sense from a risk/reward standpoint. Right now, the best performer appears to be Philip Morris International.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool recommends British American Tobacco P.l.c. and Philip Morris International and recommends the following options: long January 2026 $40 calls on British American Tobacco and short January 2026 $40 puts on British American Tobacco. The Motley Fool has a disclosure policy.
