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Better Buy: PepsiCo vs. Altria

Dan Caplinger, The Motley Fool

Among consumer-products giants, PepsiCo (NASDAQ: PEP) and Altria Group (NYSE: MO) have brand presences that span the globe. Between the beverages and snacks that Pepsi has made famous and Altria's Marlboro brand of cigarettes that smokers can still find around the world, these two companies have become a part of everyday life for millions of people.

Yet PepsiCo and Altria have also had to deal with changing consumer attitudes about their products. PepsiCo's sugary carbonated beverages have drawn fire among health advocates, and cigarettes and other tobacco products have been under attack for decades. Both companies have tried to pivot in other directions in order to address some of those attacks, but they haven't yet been completely successful in turning them back. Below, we'll look at how each of these companies has performed for investors and decide whether PepsiCo or Altria is the smarter pick for investors.

Several containers of products on a wood table.

PepsiCo makes more than just its namesake soda. Image source: PepsiCo.

Stock performance and valuation

PepsiCo and Altria have seen their stocks go in different directions lately. Over the past year, the beverage and snack giant is up 14%, but the cigarette maker has seen its stock drop 5% since March 2018.

Looking at valuation, using different methods leads to different conclusions. If you focus solely on earnings over the past 12 months and compare them to share prices, you'll run into some one-time impacts that create misleading results. For instance, PepsiCo has a trailing earnings multiple of 14, and that makes the stock look less expensive than Altria and its stock trading at more than 15 times earnings.

When you look at near-term future earnings projections, however, the picture flips. Altria trades at less than 13 times forward estimates, but PepsiCo balloons higher to climb above 20 times forward earnings. With reasonable expectations from both companies for future earnings, the forward valuation looks more realistic, giving Altria the nod on this metric.

Dividends

Both of these companies have put together extremely impressive records of paying dividends to their shareholders. Altria has the edge in terms of current yield, with its stock carrying a 5.7% dividend yield compared to PepsiCo's level just above 3%.

Dividend growth over time has also been a key component in the long-term returns these companies have delivered to investors. Altria has boosted its payout more than 50 times in the past 50 years, and the only reason it doesn't get more recognition for its policies with respect to payouts is that its numerous spinoffs have obscured the growth in the dividend over time. To be fair, PepsiCo has an impressive track record as well, with 46 straight years of dividend increases culminating in a 15% hike last summer. With an edge in yield, Altria nips out PepsiCo, but both stocks have what most dividend investors want to see in a dividend-paying investment.

Growth prospects and risks

In terms of growth, both PepsiCo and Altria have strengths and challenges. PepsiCo has recently gone through an executive transition , as new CEO Ramon Laguarta tries to step into the shoes of former chief executive Indra Nooyi. Nooyi made transformative changes to the business that were in line with shifts in consumer tastes toward healthier offerings, and Laguarta has thus far tried to keep walking that line. Some investors have been disappointed that the new CEO hasn't aimed to shake things up with a major strategic move, such as breaking up the conglomerate and separating the struggling beverage business from the soaring snack division. Still, Pepsi Zero Sugar has been a good response to health advocates calling for a move away from sugary beverages, and snack food growth has remained solid coming into 2019.

Altria, meanwhile, has been anything but quiet on the strategic front. High-profile purchases of big stakes in e-cigarette giant Juul Labs and marijuana stock Cronos Group (NASDAQ: CRON) show Altria's willingness to pursue more promising markets than its core cigarette business, costing the company almost $15 billion in total. Yet even though both cannabis and alternative tobacco products have a lot of potential, they're also quite risky, and both markets still face extensive regulatory challenges. Despite the tobacco industry's trying to promote e-cigarettes as a way to give up smoking, regulators still see them as a way to get younger users hooked on nicotine, and that'll pose a threat to Altria's attempts to help Juul move forward. Nevertheless, with cigarettes remaining in a long-term decline, the efforts Altria has made to try to spur growth are understandable.

PepsiCo and Altria Group both have a lot of promise, but Altria looks like it's the better investment right now. With a higher yield, lower valuation, and clearer pathway to growth, Altria's stock offers greater reward that compensates for any added risk it faces in its chosen industry.

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