P&G Vs. Altria: Both Offer Dividend Yields Over 3% But Which Is The Better Buy?

Procter & Gamble Co. (NYSE:PG) and Altria Group Inc. (NYSE:MO ) both offer stock dividend yields over 3% which is extremely tempting in today’s environment but which would be the better buy?

Written by Grant Miller

Sustainable competitive advantages

Often dubbed as a “moat” within investing circles, sustainable competitive advantage is what sets a company apart. This is what keeps consumers coming back to the company, and competition at bay.

P&G’s moat is provided by the mere fact the conglomerate owns a number of popular brands worldwide, including Pampers, Tide, Gillette and Duracell. Due to the trust that customers have in these brand names over the years, they are willing to pay incrementally more year after year. This helps give P&G an enviable moat.

On the other hand, Altria is the parent of the well-known Marlboro cigarettes in the United States. Similarly with P&G, the single brand alone has displayed remarkable resiliency that proves it offers an enviable moat as well. Additionally, Altria also owns a significant stake in Anheuser-Busch InBev (NYSE:BUD), the largest beer producer in the world.

...Based on sustainable competitive advantages, P&G and Altria are tied.

Financial fortitude 

Shareholders would be pleased to see the majority of their cash being returned. However, cash has more value than just being paid out in dividends. Every company needs to maintain a healthy financial supply because, at one point or another, difficult economic times will require it.

Companies that encounter such with cash have options. They can outspend competitors to gain market share, buy back their own stock on the cheap, or even make acquisitions. Conversely, debt-heavy firms or those without any cash stash in economic crises are at the opposite end of the spectrum—they are forced to slash operations, surrender market share, or even sell shares in secondary offerings in order to make ends meet.

...P&G has a financial fortitude of $13.5 billion and net income of $15.3 billion, but debt stands at $16.5 billion. Conversely, Altria possesses cash of $23.5 billion, a net income of $14.2 billion and debt at a significant lower amount than P&G at $13.9 billion.

While Altria's free cash flow (FCF) of $3.6 billion is not as notable as P&G's $9.9 billion, it is worth mentioning that the company’s FCF from its stake in Anheuser-Busch has yet to be included in company results.

Both companies have healthy net income and FCF. It is the balance sheet that pushes one company above the other: Altria has much more cash on hand than debt compared to P&G.

Altria wins the financial fortitude front.

Valuation

P&G and Altria have a tight race on the valuation front. On an earnings (P/E) basis, and a growth (PEG) basis, these two companies are nearly identical.

Altria has its P/E at 25, while P&G has its own at 24. The price-to-free cash flow ratio (P/FCF) for the Virginia-based tobacco firm is at 41 while the other stands at 23. The PEG ratio for P&G is at 3.2, while Altria has its own at 2.9. The dividend yield for the Ohio-based consumer goods titan is at 3%, while Altria is at 3.2%. For the FCF payout, P&G stands at 74% and Altria at 125%.

While Altria’s currency FCF is unclear, investors would be more comfortable with P&G’s dividend only eating up 74% of FCF over the previous year. It is likely that Altria may fall similar to this, but remains unknown for now.

Procter & Gamble wins the valuation front.

P&G vs. Altria

Based on the above 3 perspectives, both companies end up in a draw.

• With P&G, you have a company providing basic necessities that are highly recession-proof.
• Altria, meanwhile, is a company that sells some of the most addictive legal products to man.

Both companies give good reasons to buy their stocks.