Better Buy: Procter & Gamble Company vs. Philip Morris

Procter & Gamble (NYSE: PG) and Philip Morris International (NYSE: PM) are two of the oldest companies on the market. Both date back to the 1800s, traffic in consumer products, and have a number of other things in common as they have employed similar models to become leaders in their respective industries. Both are masters of marketing and distribution, and those strengths have helped them build global empires in tobacco, in the case of Philip Morris, and household products like laundry detergent and razors for Procter & Gamble.

However, both companies have struggled in more recent times as upstart competitors have stolen some of Procter & Gamble's thunder and the longstanding decline in tobacco consumption has pressured Philip Morris. As the chart below shows, both stocks have badly underperformed the S&P 500 over the last five years.

PG data by YCharts

Still, as longtime dividend payers and Dividend Aristocrats , both stocks hold appeal for a certain segment of investors, despite their recent underperformance. Let's take a closer look at where each company stands today to determine which is the better buy.

A woman shops in the shampoo aisle.

Image source: Getty Images.

A consumer giant

No company has quite the reach of Procter & Gamble. The drugstore staple owns brands like Tide, Gillette, Pampers, Crest, and many more household names. In fact, it has 22 billion-dollar brands, and another 19 with sales of $500 million or more. P&G is also a Dividend Aristocrat, having raised its dividend every year for the last 62 years. Today, Procter & Gamble offers a dividend yield of 3.6%.

However, despite Procter & Gamble's pedigree, the company has struggled recently as earnings growth has been sluggish and competition is mounting. E-commerce companies like Dollar Shave Club and Harry's have taken market share from Gillette, which has been forced to lower prices. The grooming division has also taken a hit, with organic sales down 3% in the most recent quarter with thinner margins.

In recent years, P&G has also sought to sell off minor brands in order to focus on its biggest sales drivers; however, the upheaval in the retail industry is likely to continue weighing on growth, as P&G's biggest strength may be the prized shelf space it has in drugstores in supermarkets and its brand recognition. With the rise of private-label sales at retailers like Costco and online shopping, P&G could continue to lose market share.

Still, the company is set to deliver organic sales growth of 2% to 3% this year and core earnings-per-share (EPS) growth of 6% to 8%, though that figure benefits from share buybacks and foreign currency exchange.

A person ashes a cigarette into an ashtray.

Image source: Getty Images.

Up in smoke

Philip Morris, meanwhile, was spun off from Altria in 2008. Both companies sell Marlboro and other popular cigarette brands, but Philip Morris distributes them internationally, while Altria operates in the U.S. Including its time as part of Altria, Philip Morris has raised its dividend every year for the last 49 years, and like most tobacco stocks the company is a generous dividend payer, offering a yield of 5.5%.

However, Philip Morris has had a rough year as shares have fallen 21%, primarily due to news that sales of its iQos heat-not-burn product were slowing in Japan, a key market. That news sent the stock down 16% following its first-quarter earnings report in April. However, Philip Morris introduced a plan to resolve that problem in its latest earnings report, saying it would launch a next-generation line of iQos products at the end of this year before it ramps up production next year. In Japan, meanwhile, the company is planning a new marketing program and a lower-priced line of heated tobacco devices to help boost sales.

Pivoting to products like vaporizers and heat-not-burn devices is crucial for tobacco companies like Philip Morris, because the decline in cigarette consumption will almost certainly continue as health concerns have persuaded most people not to smoke.

The good news for investors here is that Philip Morris's next-generation products are growing fast enough to replace cigarette sales -- shipments of cigarettes were down 2.8 billion in the most recent quarter, while heated tobacco unit shipments were up 4.6 billion.

What's the better buy?

On valuation, Philip Morris is the cheaper of the two stocks, trading at a P/E of 16.8, compared to Procter & Gamble at 19.2, and it is also the better dividend payer.

Both companies face challenges, especially Philip Morris with the decline in smoking. However, the company has managed the decline well thus far, and that decline has been slow enough to give it time to adapt. There's also a possibility of the company getting into marijuana sales should the legalization trend continue.

Meanwhile, Procter & Gamble may have the more favorable landscape in the near term, but the company has been relatively complacent about responding to changes in the market while its rivals have made acquisitions and smaller companies have gained footholds in the industry.

In the near term, I think both of these stocks will continue to struggle against the broader market, but Philip Morris is the better dividend payer and cheaper stock. It also will likely see faster earnings growth this year, with adjusted EPS expected to be up 8% to 10%. If the company can successfully transition to heated tobacco products, the stock could gain momentum, and I don't see a comparable opportunity in P&G.

I'm going with Philip Morris as the better buy here.

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Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool recommends Costco Wholesale. The Motley Fool has a disclosure policy .

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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