Want to protect your portfolio from a bear market? Want huge dividend income? You can get both by buying shares of nicotine producers Altria Group (MO 0.06%) and British American Tobacco (BTI -0.11%).
Few stocks offer this much downside protection and income potential. But which stock is the best?
Bear market protection vs. income potential
The nicotine market is incredibly stable. From 2018 to 2023, for instance, nicotine usage in the U.S. grew by around 1% per year, with very little variation year to year. Stable demand has allowed nicotine companies to outperform during market downturns. In 2022, the S&P 500 fell in value by around 18%. Altria stock, meanwhile, increased in value by around 4%. British American stock actually grew by 14% that year.
Not only did Altria stock beat the market that year, but the company's supersized dividend also remained rock solid. As the largest tobacco company in the U.S., with ownership over iconic brands including Marlboro, Skoal, and Black & Mild, Altria has unparalleled access to retail store shelves, strong loyalty from lifetime users, and industry-leading pricing power. All of this, combined with what is otherwise a slow-growth market, results in a lot of excess cash.
Altria has historically used the money to buy back stock, pay down debt, make acquisitions, and invest in new product lines. But one of the biggest uses of cash has been its impressive dividend, which currently stands at 8.5%. Over the past decade, through various market upturns and downswings, Altria has kept raising its dividend. The stock price hasn't kept up, causing the dividend yield to rise to today's elevated levels.
British American's dividend has also crept higher, yet its dividend history is much more volatile. Over the past decade, Altria has increased its dividend by around 102%. British American's payout, meanwhile, has risen by just 22%. Unlike Altria, British American has struggled with profitability, posting a quarterly loss earlier this year amid a drop in revenue and a change in how it values its brands.
MO Dividend Yield data by YCharts.
This stock has been the clear winner
While British American currently has a higher dividend yield, don't let that lure you into believing it has been a better bet. Over the past decade, the total return of the stock has been negative 3.6%. Altria shareholders, for comparison, have roughly doubled their original investment.
Yet past performance doesn't guarantee future results. Part of the reason that British American stock has underperformed is because the market has decided to value the company at a discounted multiple. Shares currently trade at a 17% free-cash-flow yield and a price-to-earnings (P/E) multiple of only 6.3. Altria stock, meanwhile, trades at a 11% free-cash-flow yield and a P/E multiple of 9.6.
While Altria owns some enviable brands like Marlboro, British American is no slacker. Its portfolio includes well-known products including Camel, Newport, Lucky Strike, and Dunhill. Its smokeless nicotine segment, meanwhile -- what will sooner or later become the future of every tobacco company -- is arguably more advanced than Altria's. As Fool contributor Jeremy Bowman explains, British American
has done a better job of diversifying away from cigarettes than Altria. Its new categories segment, which includes products like Vuse, which is the No. 1 e-cigarette brand in the U.S., and Velo nicotine pouches, made up 16.5% of the company's revenue last year, and it achieved profitability two years ahead of the original target with approximately $500 million in profit in 2023.
While Altria has a better resume of performance over the last decade, perhaps the wisest strategy is to split an investment into both. Owning both gives you exposure to many of the biggest tobacco brands in the U.S., plus several ways to win as the market moves toward smokeless products. British American shares have lagged Altria, but today's bargain valuation and superior dividend yield make it a worthwhile bet moving forward. And while a split investment would mainly focus on the U.S. market, British American's exposure to other markets -- including regions like the Middle East, Asia, and Europe -- somewhat diversifies your regulatory risk.
