Altria (NYSE: MO) has a huge 7.1% dividend yield. British American Tobacco (NYSE: BTI) has an even higher yield of roughly 8%. Those lofty yields are the primary reason why investors are likely to be looking at these two consumer staples giants.
But which one is the better investment choice?
The consumer staples sector is filled with companies that make products consumers buy frequently and/or consistently. Generally, demand for the products in question isn’t impacted by recessions or helped along too much by strong economic growth. They are normally necessities, like deodorant, food, and cleaning supplies. The one real exception is tobacco.
Image source: Getty Images.
Tobacco isn’t a necessity in any way. However, the nature of tobacco products, which can be addicting, turns them into a frequent purchase with buying patterns that are resistant to normal economic cycles. However, things are changing within the tobacco sector in an important way. The health risks posed by smoking have led to a steady decline in the number of smokers and, thus, the demand for tobacco products.
This simple fact is why Altria and British American Tobacco have such high dividend yields. Unless you are willing to take on the very real risk of owning a business facing secular decline, you probably shouldn’t own either of these companies. If those lofty dividend checks are just too enticing to pass up, however, there is a notable difference between these two cigarette makers that you’ll want to consider as you pick one to buy.
While cigarettes are the core of these two companies’ businesses, there is an important geographic difference. Altria, after having spun off its foreign cigarette operations into Philip Morris International (NYSE: PM), only operates in North America. (Note that Philip Morris International’s dividend yield is much lower at “just” 4.1%.) British American Tobacco’s operations are more diverse, given that it still has a global reach. This is an important difference that shows up in the volume numbers.
Altria’s cigarette volumes declined 9.7% in 2022, 9.9% in 2023, and 11.5% in the first half of 2024. In the first nine months of the year, the drop was 10.6%, but that period can’t be compared to British American Tobacco because the European company only reports semi-annually.
British American Tobacco’s volume decline in 2022 was 5.2%. In 2023, the drop was 5.5%. And through the first half of 2024, the company’s cigarette volumes were off by 6.9%. There are a few notable takeaways.
First, both companies have been using price increases to offset the impact of volume declines. That’s how they have managed to afford their lofty dividend payments despite operating clearly troubled businesses. Second, the volume declines appear to be increasing, which is yet another risk factor that investors need to consider. Indeed, at some point, price increases are likely to make the declines worse. However, the third takeaway is that Altria’s North American focus has left it with larger declines than British American Tobacco, which appears to be benefiting from the geographic diversification of its operations.
Most investors, particularly conservative dividend investors, will probably be better off avoiding both Atria and British American Tobacco. The ongoing declines in their core cigarette businesses are a huge risk that even a high dividend yield probably can’t compensate for over the long term. That said, if you still want to own one of these tobacco stocks, it seems like buying the one with the slower decline rate would be the better choice. And that means the winner of this matchup is British American Tobacco.
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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.
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