The best stock to buy right now: Coca-Cola vs. Altria

Coca cola (K.O -0.50%) and Altria (MO 0.24%) they are both classic consumer pieces for income investors. Coca-Cola is one of the largest beverage companies in the world, and Altria owns Marlboro, America’s best-selling cigarette brand. Both stocks could look like solid long-term investments.

But over the past 10 years, Coca-Cola’s stock has gained 64%, while Altria’s stock is up just 8%. On a total return basis that includes reinvested dividends, the gap closes: Coca-Cola generated a total return of 125%, while Altria delivered a total return of 103%. But which is the better stock for conservative investors here?

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The Coca-Cola business is still bright

Sales of Coca-Cola carbonated beverages have declined in recent decades as soda consumption rates have declined worldwide. But to counter this trend, the company has expanded its portfolio with more brands of fruit juices, teas, bottled water, energy drinks, coffee and even alcoholic beverages. It also refreshed its flagship sodas with new flavors, smaller portions and healthier versions to appeal to younger consumers.

Coca-Cola’s organic sales fell 9% in 2020 as restaurants and other restaurant businesses closed during the pandemic. This slowdown in the food service sector offset its stronger sales in supermarkets and other retailers. But after those tailwinds dissipated, organic sales grew 16% in both 2021 and 2022.

In 2023, the company’s organic sales rose another 13%, an increase driven in part by higher inflation-driven 2022-2023 pricing. In 2024, that measure is expected to grow another 9% to 10% and its comparable EPS to grow 5% to 6%. At $70, Coca-Cola stock still looks reasonably valued at 25 times the midpoint of this year’s earnings outlook and pays a healthy 2.8% forward dividend yield. Coca-Cola is also a dividend king, with a streak of 62 consecutive years of payout increases.

Altria’s core business is in smoke

Altria divested its international business ca Philip Morris International in 2008. After that, Altria generated most of its revenue from the US market, where it struggled with declining smoking rates and losses in market share.

From 2018 to 2023, Altria’s annual cigarette shipments fell from 109.8 billion sticks to 76.3 billion sticks as Marlboro’s retail market share fell from 43.1% to 42.1 %. (The Marlboro brand, in turn, accounts for about 90% of Altria’s cigarette sales volume.) In response to these declining volumes, Altria has repeatedly raised its per-pack prices, cut expenses, and bought back stock to squeeze more EPS growth off its stagnant earnings.

Altria also gradually diversified its business away from cigarettes with smokeless products such as snus, heated tobacco, e-vapor and electronic cigarette products, but still generated 87% of its revenue from cigarettes and cigars in 2023. The company’s best hope is to further expand its portfolio of non-smoking products through acquisitions to reduce its reliance on its shrinking cigarette business, but that strategy likely won’t halt the long-term decline.

For 2024, analysts expect Altria’s revenue to fall 1% as adjusted EPS grows just 3%. From some perspectives, its shares could be seen as cheap at 10 times forward earnings, and it still offers an impressive forward dividend yield of 8.2%. However, with anemic growth and long-term challenges, it could be a high-yield trap.

Buy better: Coca-Cola

Coca-Cola operates an evergreen business, but Altria is running out of steam and won’t be able to keep raising prices and cutting costs indefinitely to offset the impact of its declining sales volume. This difference may help illustrate Warren Buffett’s why Berkshire Hathaway still owns Coca-Cola as one of its top holdings, but does not own a single share of Altria.

Altria isn’t going bankrupt anytime soon, but it could continue to underperform Coca-Cola, other consumer staples stocks and the market overall. Its low valuation and high yield should limit its downside potential, but investors shouldn’t put too much faith in its ability to aggressively expand its smokeless portfolio to offset declining cigarette shipments.