Altria(NYSE: MO) and British American Tobacco(NYSE: BTI) are two of the largest cigarette companies in the world. They both offer massive dividend yields, with Altria at 9.3% and British American Tobacco at 9.8%. That's in fact the main reason that most investors will be interested in either of these two companies. But which of these high-yield stocks is the better option?
Warning: You might want to avoid them both
Before looking at whether Altria or British American Tobacco is the better company, it is important to take a look at another issue. Do you want to own a cigarette company at all? Yes, the huge dividend yields are attractive, but the businesses that support those yields are facing a secular decline.
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In 2018 Altria produced 109.8 billion cigarettes. By 2023 that number had declined to 76.3 billion. Some simple math shows that this is a roughly 30% drop, which is clearly not a positive trend. The story is no different for British American Tobacco. In 2018 the company produced around 700 billion cigarettes. In 2023 the figure was just 555 billion. That's a roughly 21% drop.
If you buy either of these companies, you are investing in a business that is facing fundamental struggles. Yes, both companies have been able to raise cigarette prices to offset the impact of volume declines. But that can only go on for so long before a tipping point is reached and price hikes actually make the volume declines worse. Conservative income investors should probably avoid both of these high-yield stocks.
British American Tobacco has more positive news than Altria
If that warning isn't enough to keep you away from these cigarette makers, then the next question to ask is which one is better? The answer today appears to be British American Tobacco. There are two main reasons for this.
First, Altria's business is constrained to the U.S. market following its separation from Philip Morris International(NYSE: PM), which controls the Philip Morris brands outside the United States. The United States has been working very hard to dissuade consumers from smoking, and the industry has been in a very long downtrend. Given that this is basically the only market in which Altria operates, it is at a strategic disadvantage compared to British American Tobacco, which sells cigarettes in multiple markets around the world.
Although smoking is in a broad downtrend globally, each market is different. For example, British American Tobacco's organic revenue growth in 2023 was 0.6%. That gain was a mixture of weak U.S. performance of negative 6.4%, but a 6.8% gain from the rest of the world. While that doesn't actually speak to the ongoing volume declines, it does highlight the added flexibility that British American Tobacco has because of its global portfolio.
Second, Altria has made too many strategic missteps. The first was breaking up its U.S. business and foreign business. Indeed, Philip Morris International has basically turned into a competitor now that it is entering the U.S. market with non-cigarette products. But that breakup was also followed up with failed investments in vape brand Juul and a marijuana company, both of which resulted in massive write offs. And now Altria is trying again with vaping, with its recent purchase of NJOY. That vape company is further along in its development, so the outcome this time might be better, but the list of errors here is still troublingly long.
For comparison, British American Tobacco was able to announce that its non-cigarette operations, which it calls new categories, achieved profitability in 2023. Notably, profitability was reached two years ahead of the company's internal targets. In other words, British American Tobacco appears to be executing better than Altria when it comes to moving beyond cigarettes.
The better of two struggling companies
Both Altria and British American Tobacco are facing huge headwinds in their most important line of business. Most investors will probably want to stay on the sidelines here despite the huge dividend yields on offer. But if you are willing to take on a risky investment, it seems like British American Tobacco has both a fundamental advantage (a global reach) and is executing better right now (relatively impressive success with non-cigarette investments). If you had to pick one of these two tobacco giants, British American Tobacco looks like the better choice right now.
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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.
