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Better Buy: Altria Group vs. Verizon

Dan Caplinger, The Motley Fool

Dividend investors like stocks that pay substantial amounts of income, and both Altria Group (NYSE: MO) and Verizon Communications (NYSE: VZ) fit the bill. The tobacco giant and the U.S. wireless telecom king have both been able to pay attractive dividends for a long time, raising their payouts over the years to reward long-term shareholders.

Yet now, both companies face obstacles to their continued growth. And that has some investors wondering whether they're both still smart choices to add to their portfolios. With that in mind, below we'll take a look at Altria and Verizon to compare their strengths and weaknesses to see which one makes more sense as a buy.

Tobacco leaf hanging in a crude facility.

Image source: Getty Images.

Stock performance and valuation

Neither Altria nor Verizon has delivered strong returns for investors, but Verizon at least has avoided substantial losses. The wireless company has seen its stock climb 2% since June 2017, compared to a decline of almost 25% in Altria shares over the same period.

Given how far the overall stock market has climbed, many stocks have seen their valuations soar. But these two stocks remain pretty attractively valued when you look at traditional earnings-based metrics. Numbers based on trailing earnings are skewed somewhat by one-time impacts from tax reform, but Verizon's trailing multiple of 6 is a lot less than the 10 times trailing earnings at which Altria stock trades. When you incorporate future earnings expectations, a similar relationship applies, with Verizon sporting a forward multiple of 10, while Altria weighs in at 13. Despite its better price action, Verizon looks like a better value at current prices.

Dividends

It's hard to find blue-chip stocks that will match Altria and Verizon on the dividend front. Both companies currently sport yields of 4.8%, which is far above the 2% average in the overall market right now.

Looking beyond raw yield, you'll find a lot of similarities between these two stocks, despite the fact that they operate in very different businesses. When you adjust for one-time items, payout ratios look relatively similar, and both stocks have a nice history of dividend growth behind them. Just about the only clear edge is that Altria has been more generous recently in granting dividend increases, with its most recent boost of 6% having come in March, just six months after its last hike during the fall of 2017. By contrast, Verizon's last move came in September 2017, with just a 2% increase. That just barely gives Altria an edge over Verizon on the dividend front.

Growth prospects and risks

Despite being huge businesses, Altria and Verizon both have to deal with fundamental obstacles to future growth. For Altria, the major issue has been finding ways to continue to boost revenue and profit even as sales volumes of cigarettes are on the decline. Altria has hoped to turn increasingly toward reduced-risk products, such as e-cigarettes or heated tobacco units, in order to cater to changing consumer preferences and find a long-term pathway to prosperity.

Yet those efforts haven't gone perfectly, as the U.S. Food and Drug Administration continues to flex its regulatory muscles to clamp down on the tobacco industry. New measures seeking to regulate nicotine levels could prove difficult to overcome, and even pressure on alternatives to traditional cigarettes could put barriers in the way of Altria's attempts to broaden its business.

Verizon is arguably in a better position. It's dealing with a price war for its wireless service, but that comes at a time in which the leading U.S. wireless provider also sees the need to make massive upgrades to its service quality in order to accommodate ongoing technological advances. Rollouts of 5G network capabilities will be ongoing for Verizon, and customers will expect the superior service 5G can provide at a competitive price. Consolidation elsewhere in the U.S. wireless market could have mixed effects, raising the ante among the top players in the market -- but also setting the stage for disciplined behavior if price wars can end.

At this point, Verizon's path forward is clearer than Altria's, making it a better bet. Although the tobacco giant has survived difficult conditions in the past, it's still not evident exactly how the Marlboro maker can deal with current uncertainties. But Verizon can simply keep working on its 5G projects and turn demand for broadband services into profit.

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Dan Caplinger has no position in any of the stocks mentioned. The Motley Fool owns shares of Verizon Communications. The Motley Fool has a disclosure policy.