Tag Archives: NYSE:MO

Why Altria trades at a 28% discount to Philip Morris

At ~$41 per share, Altria (NYSE:MO) trades at a P/E of ~10 and offers a yield of ~8.1%. At ~$72 per share, Philip Morris (NYSE:PM) trades at ~13.9 times earnings and offers a yield of 6.5%. Why is MO cheaper than PM?

One reason is MO’s bigger debt levels, such that its S&P credit rating is “BBB”, which is much worse than PM’s “A” rating.

Another reason is that investors are worried that a MO-PM merger would lead to essentially a dividend cut for current MO shareholders. PM currently offers a 6.5% yield that’s 20% lower than MO’s current yield.

Since the merger could be a potential all-stock, merger of equals, based on Tuesday’s market close prices, the combined market cap of Altria and Philip Morris would be ~$190.3 billion.

Additionally, based on the percentage of their current market caps the combined company’s annual payout would be ~$4.14 per share with a share price of ~$59.54 for the combined company. This implies a yield of ~6.95% for the combined company.

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Top 10 Consumer Staples: Are There Any Worthy Buys? Part 4

In the last 12 months, the Consumer Staples ETF (NYSEARCA:XLP) has outperformed the SPDR S&P 500 Trust ETF (NYSEARCA:SPY). The SPY has risen 3.6%, while the XLP has appreciated 8.5%. Over longer periods, the XLP has tended to be market perform or market outperform while offering a higher yield.

Now that the Consumer Staples sector as a whole has outperformed the market recently, it may be time to consider taking some profits or simply do nothing and collect the dividends.

Investors planning to make new investments in this sector should be extra careful about valuation and determine how much they’re willing to pay.

Procter & Gamble Co (NYSE:PG), The Coca-Cola Co (NYSE:KO), and PepsiCo, Inc. (NYSE:PEP) trade at relatively expensive multiples compared with their historical trading levels. Although the companies still pay solid dividends at yields of about 3%, investors can probably find better opportunities for total returns in new investments.

For example, Philip Morris International Inc. (NYSE:PM) and Altria Group Inc (NYSE:MO) trade at similar multiples to PG, KO, and PEP but offer higher yields with better growth prospects — albeit not an apple to apple comparison.

CVS Health Corp (NYSE:CVS) benefits from an aging population in the U.S. Further, CVS trades at a reasonable multiple of 17.5, making it one of the better opportunities to explore for total returns in the double-digits if investors don’t need immediate income.

The above is an excerpt from my Seeking Alpha article. So, to learn more about earnings estimates and dividend information of each company, check out the article here: Top 10 Consumer Staples: Are There Any Worthy Buys? Part 4

This is a part of a series covering the top stocks in each sector:

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Disclosure: At the time of writing, I own shares in AAPL, AMGN, FB, NKE, and SBUX.

Disclaimer: I am not a certified financial advisor. This article is for educational purposes, so consult a financial advisor and or tax professional if necessary before making any investment decisions.

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