Better Dividend Buy: Verizon Communications vs. Altria

7/31/20

By Leo Sun, Motley Fool

Verizon (NYSE:VZ) and Altria (NYSE:MO) are two different types of companies that attract investors for similar reasons: stability and dividends.

Verizon, one of the top telecom companies in America, pays a forward dividend yield of 4.3% and trades at just 12 times forward earnings. Altria, the country's largest tobacco company, pays an even higher forward yield of 8% while trading at an even lower forward P/E of 10.

Verizon has raised its dividend for 13 straight years, while Altria hiked its payout every year after spinning off its overseas business Philip Morris International in 2008. Both stocks' total returns, which include reinvested dividends, have surpassed 200% over the past 10 years.

Based on these facts, Verizon and Altria seem like rock-solid income investments. But if we take a closer look at both companies, we'll realize one is a better all-around investment than the other.

A burlap sack labeled Dividends

IMAGE SOURCE: GETTY IMAGES.

Verizon faces near-term headwinds

Verizon generates most of its revenue by selling wireless hardware -- including phones and Internet of Things (IoT) devices -- and the associated wireless services to consumers and businesses. At the end of 2019, it provided postpaid wireless services to approximately 95 million consumers and 25 million business customers.

A woman uses a smartphone.

IMAGE SOURCE: GETTY IMAGES.

Verizon generates less revenue from its wireline business, which was downsized in recent years to divert its resources toward its higher-growth wireless segment. However, this business still hosted nearly 6.5 million broadband connections and 4 million Fios video connections at the end of 2019.

Verizon's operating revenue grew less than 1% to $131.9 billion in 2019, as its higher service revenue offset its lower hardware sales. Slower smartphone sales and intense competition from AT&T and T-Mobile exacerbated that pressure. However, lower operating expenses boosted Verizon's adjusted earnings by 2% to $4.81 per share -- which comfortably covered its $2.44 per share in dividends.

Verizon pulled its full-year revenue guidance in the first quarter due to the COVID-19 crisis, and it cut its adjusted earnings-per-share (EPS) forecast from 2% to 4% growth to -2% to 2% growth. Wall Street expects its revenue to decline by 3% and 1%, respectively, for the full year.

However, Verizon's growth could accelerate again next year as new 5G devices spark upgrades of older devices and plans. New 5G networks could also expand Verizon's reach in next-gen markets like IoT devices and connected cars, while its ongoing fiber upgrades could boost its broadband revenue.

Altria faces long-term headwinds

Altria generates most of its revenue from its flagship cigarette brands, mainly Marlboro, while the rest is mainly split between its cigar, snus, and wine brands. Altria's core business faces several long-term headwinds.

First, adult smoking rates in America plunged from 20.9% to 13.4% between 2005 and 2018, according to the Centers for Disease Control and Prevention, and should continue declining over the long term. Meanwhile, Marlboro's market share has seemingly peaked in the domestic market, dipping from 43.2% in 2018 to 43.1% in 2019. As a result, Altria's total cigarette shipments declined 7% last year.

A person snaps a cigarette in half.

IMAGE SOURCE: GETTY IMAGES.

Altria usually raises its prices to offset its declining shipments, but rising excise taxes across America could cripple that strategy. It also cuts costs, reduces its head count, and repurchases shares to squeeze out earnings growth from anemic sales growth, but those strategies are also tough to sustain over the long term.

Altria's attempts to expand beyond cigarettes -- including its investments in the e-cigarette maker Juul, the cannabis company Cronos Group, and Philip Morris' IQOS heated tobacco devices -- were also closely scrutinized and haven't generated meaningful revenue yet.

Altria's revenue, excluding excise taxes, rose less than 1% to $19.8 billion in 2019. Its adjusted EPS, buoyed by buybacks and cost-cutting measures, rose 6% to $4.22 -- which easily covered its annualized dividends of $3.36 per share.

Altria withdrew its full-year guidance in the first quarter due to COVID-19, but analysts expect its revenue and earnings to rise 3% and 1%, respectively. That growth will be driven by price hikes, cost-cutting measures, and three temporary tailwinds -- trade inventory movements, calendar differences, and consumers stocking up during the crisis -- instead of a sustainable recovery in its core business.

The clear winner: Verizon

Verizon pays a lower dividend and trades at a higher multiple than Altria, but it's a better overall investment.

Verizon's core smartphone market is saturated, but it doesn't face a terminal decline like Altria's tobacco market. Verizon will also likely benefit from long-term tailwinds, including 5G networks and IoT devices, as Altria grapples with declining smoking rates, higher taxes, and tougher regulations.

Simply put, I'm confident Verizon's stock will rise and generate stable returns over the next decade. But I'm not certain Altria's desperate strategies of raising prices, cutting costs, and buying back stock can offset the slow death of its core business.

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