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Better Bear Market Buy: Coca-Cola vs. Altria

Coca-Cola (NYSE: KO) and Altria (NYSE: MO) are both often considered good defensive plays for bear markets. Both consumer staples giants boast wide moats, generate stable profits, and pay high dividends — all of which are attractive qualities as investors rotate away from riskier investments.

So should investors buy either of these blue-chip plays as rising rates drag the S&P 500 into a new bear market? Let’s review their business models, growth rates, and valuations to find out.

The similarities and differences

Coca-Cola and Altria sell different kinds of products, but they both face secular headwinds in their respective markets. Coca-Cola has been grappling with slower sales of its flagship soda and other carbonated drinks as customers pivot toward healthier drinks. Altria, the top tobacco company in America, has been struggling with declining smoking rates, rising excise taxes, and stiff competition for its flagship Marlboro cigarette brands.

Image source: Getty Images.

Coca-Cola countered those headwinds by expanding its beverage portfolio with more varieties of juices, teas, sports drinks, bottled water, coffee, and even alcoholic beverages in select markets. It’s also refreshed its flagship sodas with lower-calorie versions, new flavors, and smaller serving sizes.

Altria has repeatedly raised its cigarette prices to offset its slowing shipments and higher taxes over the years. It also expanded its portfolio with cigars, oral tobacco products (including snus and nicotine gum), and electric “heated tobacco” products which heat up sticks of tobacco instead of burning them.

Both companies also tightly control their costs and frequently repurchase their shares to boost their earnings per share (EPS) while consistently raising their dividends. Coca-Cola is a Dividend King that has raised its dividend annually for six straight decades. Altria has boosted its dividend every year since it spun off its international operations as Philip Morris International in 2008.

Which company generates more stable growth?

Coca-Cola’s organic revenue declined 9% in 2020 as many dining establishments and outdoor venues closed down during the pandemic. That slowdown overwhelmed its robust sales through retail stores. Its comparable EPS declined 8%, and its free cash flow (FCF) only increased 8%.

But in 2021, Coca-Cola’s organic sales jumped 16% as those pandemic-related headwinds dissipated. Its comparable EPS increased 19%, and its FCF increased 30% to $11.3 billion. It paid out $7.3 billion of that total as dividends but didn’t buy back any shares. It plans to restart repurchasing shares with about $500 million in planned buybacks this year.

For 2022, Coca-Cola expects its organic revenue to rise 7% to 8%, even after factoring in the suspension of its operations in Russia, and for its comparable EPS to grow 5% to 6%. It expects its FCF to dip 7% to $10.5 billion, but that’s still more than enough to cover its dividends and planned buybacks.

Altria didn’t suffer a major pandemic-induced slowdown. Its revenue (excluding excise taxes) rose 5% in 2020 even as its adjusted shipments of cigarettes slipped 2%. It offset that slowdown by charging higher prices and selling more cigars and oral tobacco products. Its adjusted EPS grew by 4%.

In 2021, Altria’s revenue (excluding excise taxes) inched up 1% — even as its adjusted shipments of cigarettes fell 6%. Its adjusted EPS rose 6% as it repurchased $1.7 billion in shares and paid out $6.4 billion in dividends. Together, those buybacks and dividends consumed about 99% of its FCF.

This year, analysts expect Altria’s revenue (excluding excise taxes) to dip less than 1% as its adjusted EPS increases 5%. Unlike Coca-Cola, Altria doesn’t have any direct exposure to Russia or currency headwinds. However, it will likely struggle to raise prices in the U.S. as inflation hits a 40-year high, and that weaker pricing power could prevent it from squeezing out more revenue from its lower shipments.

The dividends and valuations

Coca-Cola pays a forward yield of 3%, while Altria pays a much higher forward yield of 8%. However, Altria’s yield was inflated by the stock’s 40% price decline over the past five years amid concerns about its slowing growth, tighter government regulations, and ugly writedowns related to its stake in the struggling e-cigarette maker Juul. Coca-Cola’s stock price steadily rose 30% during those five years.

Even after factoring in reinvested dividends, Altria generated a negative total return of nearly 20% over the past five years. Coca-Cola delivered a total return of 50% during the same period.

Past performance never guarantees future gains, but the forward valuations indicate that investors are more optimistic about Coca-Cola’s growth prospects. Coca-Cola currently trades at 24 times forward earnings, while Altria has a much lower forward price-to-earnings ratio of nine.

Altria’s higher yield and lower valuation might initially make it look more appealing in this volatile market, but its long-term growth prospects look a lot murkier than Coca-Cola’s. Meanwhile, Coca-Cola will likely generate stable revenue and earnings growth for decades to come — which makes it a better all-around defensive play in a brutal bear market.

Leo Sun has no position in any of the stocks mentioned. The Motley Fool recommends Philip Morris International and recommends the following options: long January 2024 $47.50 calls on Coca-Cola. The Motley Fool has a disclosure policy.

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