I have decided to use Google to track the portfolio as the way I was doing it was not accounting for items like the Phillip Morris International (PM) split from Altria (MO).
I will ad other features as I am able.
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Here are some of the interesting exchanges during the recent PMI (PM) earnings call.
Filippe Goossens – Credit Suisse: “Okay. The next question, Hermann, if I have my numbers correct using your $0.46 in dividends for the quarter, if I annualize that and I look at the share price, obviously, the share price will be up this morning, but I’m coming out with less than 4% dividend yield, which puts you at the lower end, particularly compared to the U.S. players out there. When can we expect the dividend payouts to go up, particularly if you look at your very strong balance sheet even after the share buybacks?”
Hermann Waldemer (CFO): “Okay, I think there we have to stay with the facts. The facts are that we have an annual rate of 184. We have $0.46 cents for the quarter. The other fact is that we have a payout ratio of 65%. And the rest is entirely up to the Board and it is a Board decision, including the timing.”
At the new earnings level predicted the payout ought to rise to about $2.05 to $2.10 a share. Probably will not be announced until the fall when EPS for the year is more predictable.
China:
Christine Farkas – Merrill Lynch: “Okay, great. And the final question, Hermann, is on China. Can you just update a little bit on the progress there and what you see in the remainder of the year in both the export business as well as Marlboro within China?”
Hermann Waldemer: “Okay. In China we are really absolutely on track, also, compared to what we said during the road show. So we expect on the domestic market the launch of licensed-produced volume Marlboro in China actually the summer of this year. This is going to come. We are on track on this one.”
After another China question:
“Right. On China, I mean, meaningful EPS impact for this year, no. That’s just too small to have an effect.
Look, I mean, the key point really is for China to be [inaudible] partner of the China National Tobacco Company there. That is really the key in there; it is building long-term relationships in China.
And that has really two elements to it, which is the China domestic element – that is Marlboro licensed production for the summer – and that is then on the other side really doing business internationally with them”
The fact that the largest smoking population in the world is “not yet meaningful” ought to underscore for those wondering how much growth there still is for the company the international smoking market.
On Recent Interval Acquisition:
Thomas Russo – Russo, Gardner & Gardner: “You bet. A couple of questions. First, talk about the Interval acquisition and what the market is like in France for leaves. I think that’s where you suggested that it was intended to serve your needs. And then what’s the market like for fine cut in France?”
Hermann Waldemer: “Okay. Interval, actually, I mean, on that acquisition I would say we have said before that we are a tobacco company. There you see we mean that serious. Actually, Interval has a 14.8% share of the fine cut market in France. An estimated operating company’s income of that would be some 25 million Euros. That’s about the size of the business there.
Important is actually this is the leading brand amongst young adults, legal age to 29. So it complements, I would say, our portfolio very nicely. We have been in that market in the entire EU region quite a bit, but we have been in there mostly with our cigarette trademarks and there we really have now a real grow-your-own trademark there, we have acquired there, so that’s another positive of that acquisition.”
Other notes:
* Currency was $.09 of the $.20 earnings beat
* $13 billion, two year stock repurchase begins in May.
Disclosure (“none” means no position):Long PM
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Now this is an earnings release…..
Phillip Morris International (PM) reported its first Post-Altria (MO) spin quarter moments ago and investors ought to be celebrating.
The numbers:
* Diluted earnings per share of $0.89, up 29.0% from $0.69, including the items detailed on Schedule 4
* Adjusted diluted earnings per share of $0.89, up 30.9% from the 2007 pro-forma adjusted earnings per share of $0.68, including the items detailed on Schedule 5
* PMI increases its forecast for 2008 full-year diluted earnings per share, projecting growth of approximately 14% to 16% to a range of $3.18 to $3.24, from a revised 2007 pro-forma adjusted base of $2.79
* PMI’s new guidance reflects favorable currency, business momentum and increased reinvestment in some key markets
* PMI to acquire Interval and other trademarks in the Other Tobacco Products (OTP) category from Imperial Tobacco Group PLC for 254 million euros
“Our robust first quarter results are a terrific start out of the gate,” said Louis Camilleri, Chairman and Chief Executive Officer.
“Importantly, we continue to witness an improvement in our business fundamentals as evidenced by the double-digit revenue and income growth recorded in each of our geographic segments.”
PMI reaffirms its previously announced intention to pay a dividend at the initial rate of $0.46 per share per quarter, or $1.84 per common share on an annualized basis. PMI has established a dividend policy that anticipates a payout ratio of approximately 65%.
As previously announced, the $13.0 billion two-year share repurchase program for PMI is expected to begin in early May (12.3% of outstanding market cap).
This is what investors who held shares in the spin expected. Mid double digit EPS growth, a massive share repurchase and growth in markets.
This will be a great holding for a very long time…
Disclosure (“none” means no position):Long PM,MO
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Now this is an earnings release…..
Phillip Morris International (PM) reported its first Post-Altria (MO) spin quarter moments ago and investors ought to be celebrating.
The numbers:
* Diluted earnings per share of $0.89, up 29.0% from $0.69, including the items detailed on Schedule 4
* Adjusted diluted earnings per share of $0.89, up 30.9% from the 2007 pro-forma adjusted earnings per share of $0.68, including the items detailed on Schedule 5
* PMI increases its forecast for 2008 full-year diluted earnings per share, projecting growth of approximately 14% to 16% to a range of $3.18 to $3.24, from a revised 2007 pro-forma adjusted base of $2.79
* PMI’s new guidance reflects favorable currency, business momentum and increased reinvestment in some key markets
* PMI to acquire Interval and other trademarks in the Other Tobacco Products (OTP) category from Imperial Tobacco Group PLC for 254 million euros
“Our robust first quarter results are a terrific start out of the gate,” said Louis Camilleri, Chairman and Chief Executive Officer.
“Importantly, we continue to witness an improvement in our business fundamentals as evidenced by the double-digit revenue and income growth recorded in each of our geographic segments.”
PMI reaffirms its previously announced intention to pay a dividend at the initial rate of $0.46 per share per quarter, or $1.84 per common share on an annualized basis. PMI has established a dividend policy that anticipates a payout ratio of approximately 65%.
As previously announced, the $13.0 billion two-year share repurchase program for PMI is expected to begin in early May (12.3% of outstanding market cap).
This is what investors who held shares in the spin expected. Mid double digit EPS growth, a massive share repurchase and growth in markets.
This will be a great holding for a very long time…
Disclosure (“none” means no position):Long PM,MO
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Here is the cost basis for your shares after the spin for both altria (MO) and Phillip Morris International (PM).
Your Altria shares are to be adjusted to 30.5% of the cost and your PM shares are at 69.5%.
Here is the document from Altria.
Disclosure (“none” means no position):Long MO, PM
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Altria (MO) had its investor day in NY to discuss it upcoming spin.
Shareholders as of March 19 will receive 1 share of Phillip Morris International for each Altria share they hold on March 28, the spin date.
Guidance:
Altria (MO):
* 2008 full-year diluted earnings per share from continuing operations are projected to grow approximately 9% to 11% from an adjusted base of $1.50, excluding PMI.
* Long term total annual shareholder return of over 12% when combined with the dividend
* EPS growth in the range of 8% to 10%
* An anticipated dividend payout ratio of 75%, with an initial post-spin annualized dividend rate of $1.16 per share;
* A planned share repurchase program of $7.5 billion over the next two years, which will commence in April of this year;
* Approximately $1.0 billion in cumulative annual cost savings, $300 million of which were realized in 2007 and approximately $700 million in additional savings to be realized by the end of 2011.
* Tests in both smokeless and snus are going “very well”
Phillip Morris International (PM):
* Full-year diluted EPS from continuing operations are projected to grow 12% to 14% from a 2007 pro-forma adjusted base of $2.78.
* Long term revenue growth, net of excise taxes, of 4% to 6%; shipment volume growth of 1% to 2%; operating income growth of 6% to 8%; earnings per share growth in the range of 10% to 12%
* Dividend policy anticipates a pay-out ratio of 65%. The initial annual dividend rate has been set at $1.85 per share.
* A share repurchase program of $13 billion over two years.
* Expect to return approximately $21 billion to shareholders over the next 2 years.
* $1.0 billion in cumulative annual cost savings by the end of 2010; and a cumulative total cash flow of approximately $22 billion by the end of 2010.
Why is the cig biz so good? Altria’s cost to produce 1000 cigarettes is $16.40. Talk about profit margin? This is 16% to 21% lower than the competition.
I own Altria and plan to hold both for the foreseeable future…
Disclosure (“none” means no position):Long MO, Long PM (post spin)
Rumors are circulating that the “financial flexibility to respond to opportunites” Altria’s (MO) Louis Camilleri was alluding to last week means that the company is going to acquire UST (UST). I am not so sure…
According to an article in Reuters
“The writing is on the wall, and has been on the wall for years, that this was the inevitable combination,” said one consumer investment banker, who declined to be named.
“Altria has made no secret of its intentions for the smokeless market. But Altria had a lot of steps to make before they could make a move. Of course, in that time, UST’s prize smokeless business has deteriorated some,” the banker said.
All of the above is true, but, if Altria has had the acquisition in mind for years, why would they have spent millions developing and testing their own product? wouldn’t it just have made sense to make the purchase of UST before?
I do not believe any delay in a potential purchase had anything to do with the recently announced PMI spin. Both Phillip Morris USA (PMUSA) and Phillip Morris International (PMI) have made acquisitions during the past few year. As a matter of fact as recently as last fall PMUSA announced they were buying cigar maker John Middleton.
Further, if UST is facing declining usage of it products (they are), then why make the move now? Altria’s own smokeless products are virtually set to be rolled out nationally and based on the latest conference call, Camilleri was almost giddy over the results to date and the products potential.
Assuming Camilleri is not lying, wouldn’t the prudent thing to do be to wait? Let your products further erode UST’s smokeless business even more and then correspondingly watch the price you have to pay for UST to decline in tandem?
What if Camilleri’s enthusiasm if warranted and Altria has a massive hit on its hand? They would in effect take a giant swath of business from UST and any price paid today, would look excessive down the road.
It isn’t that a potential purchase of UST would be bad for Altria (it would be great), it is that the timing of doing it now just would not seem to make a whole lot of sense. It would seem that doing it a year or so ago or a year or two from now would be a far more economically sound decision.
Disclosure (“none” means no position): Long MO, None
Here are the answers to many of the questions you may have on the upcoming PMI (Phillip Morris International) spin from Altria (MO).
Q: I own Altria shares. What will I receive as a result of the Spin-off?
A: Altria will distribute one share of PMI common stock for each share of Altria common stock outstanding as of the Record Date for the Distribution.
Q: What is the Record Date for the Distribution, and when will the Distribution occur?
A: The Record Date is , , and ownership is determined as of 5:00 p.m. Eastern Time on that date. Shares of PMI common stock will be distributed on , . We refer to this date as the Distribution Date.
Q: What do I have to do to participate in the Distribution?
A: Nothing. You will receive one share of PMI common stock for each share of Altria common stock held as of the Record Date. You may also participate in the Distribution if you purchase Altria common stock in the “regular way” market and retain your Altria shares through the Distribution Date.
Q: If I sell my shares of Altria common stock before the Distribution Date, will I still be entitled to receive PMI shares in the Distribution?
A: If you sell your shares of Altria common stock prior to or on the Distribution Date, you may also be selling your right to receive shares of PMI common stock. You are encouraged to consult with your financial advisor regarding the specific implications of selling your Altria common stock prior to or on the Distribution Date.
Q: How will the Spin-off affect the number of shares of Altria I currently hold?
A: The number of shares of Altria common stock held by a stockholder will be unchanged. The market value of each Altria share, however, will decline to reflect the impact of the Distribution.
Q: What are the U.S. federal income tax consequences of the Distribution to U.S. stockholders?
A: Altria [has received] a private letter ruling from the Internal Revenue Service and an opinion of counsel that the Distribution of PMI common stock to Altria stockholders will qualify as a tax-free distribution for United States federal income tax purposes. You should, of course, consult your own tax advisor as to the particular consequences of the Distribution to you, including the applicability and effect of any U.S. federal, state and local and foreign tax laws, which may result in the distribution being taxable to you. Altria will provide its U.S. stockholders with information to enable them to compute their tax basis in both Altria and PMI shares. This information will be posted on Altria’s website, www.altria.com/PMIspinoff, promptly following the Distribution Date. Certain United States federal income tax consequences of the Spin-off are described in more detail under “The Distribution—U.S. Federal Income Tax Consequences of the Distribution.”
Q: Is the Distribution tax free to Canadian stockholders?
A: Altria anticipates that the Canadian revenue authority will conclude that the Spin-off is an “eligible distribution” for electing Canadian resident stockholders and thus eligible for tax-deferral. Altria will post the results of the Canadian revenue authority’s determination on its website once such results become available. Absent the tax-deferral, Canadian-resident stockholders would be required to include the distribution of PMI common shares in computing income under the Canadian Tax Act.
The foregoing is for general information purposes and does not constitute tax advice to any Canadian stockholder. Such stockholders should consult their own tax advisors regarding the particular consequences of the Distribution to them, including the applicability and effect of any Canadian federal, provincial and territorial and foreign tax laws and regarding the actions and information necessary to make the required election, in the event that the Canadian revenue authority determines that the Spin-off is an “eligible distribution” for electing Canadian-resident stockholders.
Q: When will I receive my PMI shares? Will I receive a stock certificate for PMI shares distributed as a result of the Spin-off?
A: Registered holders of Altria common stock who are entitled to participate in the Distribution will receive a book-entry account statement reflecting their ownership of PMI common stock. For additional information, registered stockholders in the U.S. should contact Altria’s transfer agent, Computershare Trust Company, at [1-866-538- ] or by e-mail at altria@computershare.com. Stockholders from outside the U.S. and Canada may call [1-781-575- ]. If you would like to receive physical certificates evidencing your PMI shares, please contact PMI’s transfer agent. See “Description of Capital Stock—Transfer Agent and Registrar.”
Q: What if I hold my shares through a broker, bank or other nominee?
A: Altria stockholders who hold their shares through a broker, bank or other nominee will have their brokerage account credited with PMI common stock. For additional information, those stockholders should contact their broker or bank directly. Questions regarding the Distribution can also be directed to our information agent, D.F. King & Co., Inc., at [1-800-290- ].
Q: What if I have stock certificates reflecting my shares of Altria common stock? Should I send them to the transfer agent or to Altria?
A: No, you should not send your stock certificates to the transfer agent or to Altria. You should retain your Altria stock certificates. No certificates representing your shares of PMI common stock will be mailed to you. PMI common stock will be issued as uncertificated shares registered in book-entry form through the direct registration system.
Q: If I was enrolled in an Altria dividend reinvestment plan, will I automatically be enrolled in the PMI dividend reinvestment plan?
A: Yes. If you elected to have your Altria cash dividends applied toward the purchase of additional Altria shares, the PMI shares you receive in the Distribution will be automatically enrolled in the PMI Direct Stock Purchase and Dividend Reinvestment Plan sponsored by Computershare Trust Company (PMI’s transfer agent and registrar), unless you notify Computershare that you do not want to reinvest any PMI cash dividends in additional PMI shares. Contact information for the PMI plan sponsor (Computershare) is provided on page 92 of this Information Statement.
Q: Why is Altria separating PMI from its business?
A: Altria’s Board of Directors and management have determined that the separation will enhance long-term stockholder value by providing the benefits set forth below under the caption “The Distribution—Reasons for the Distribution.”
Q: Why is the separation of the two companies structured as a spin-off?
A: A U.S. tax-free distribution of shares in PMI is the most tax efficient way to separate the companies.
Q: Are there risks to owning PMI common stock?
A: Yes. PMI’s business is subject both to general and specific business risks relating to its operations. In addition, the Spin-off presents risks relating to PMI’s being a separately-traded public company. See “Risk Factors.”
Q: Does PMI plan to pay dividends?
A: Yes. PMI plans to pay a dividend at the initial rate of $ per share per quarter. Dividends are subject to the discretion of PMI’s Board of Directors in accordance with applicable law. See “Dividend and Share Repurchase Policy.”
Q: What will the relationship between Altria and PMI be following the Distribution?
A: After the Distribution, Altria will not own any shares of PMI common stock. However, in connection with the Distribution, we are entering into a number of agreements with Altria that will govern the Spin-off and our future relationship with Altria. See “Relationship with Altria.”
Q: What will Altria own following the Distribution?
A: Altria will own 100% of PM USA and Philip Morris Capital Corporation, as well as its 28.6% economic interest in SABMiller plc.
Here are some details on the upcoming independent PMI.
Altria’s (MO) subsidiary, Phillip Morris International (PMI) on Thursday took the first regulatory step toward a spinoff of the company’s overseas tobacco business.
PMI filed a Form 10 with the Securities and Exchange Commission, a move expected since Altria’s announcement last month. The cigarette maker said it anticipates making a final decision and announcing the timing of any spinoff at its regularly scheduled board meeting Jan. 30. In it Atria revealed the spin off will be a share for share event meaning that Altria shareholders will receive one share of PMI for each share of Altria they own. I will answer a full Q&A in another post.
Valuation:
In 2006 PMI had net income of $6.1 billion. I use it because 2007 is not yet complete and want to use a hard number. The spin will produce 2.1 billion shares making the initial EPS approximately $3 a share. If we give PMI a 15 multiple (middle of the road) that places the value of it at $91.5 billion dollars and with 2.1 billion shares being distributed that means we get a share price of about $45.
Cash Flow, Dividend and Debt:
Cash flow from operations for the first six months of 2007 was a staggering $4.2 billion. In 2006, PMI paid Atlria $3 billion in dividends. If kept consistent that would equate to $1.42 a share or a yield of 3.1% (assuming the above valuation). in 2006 PMI had a paltry $2.2 billion in long term debt and shareholder equity of $14 billion. If the debt to equity ratio was brought up to 1, bu no means excessive and easily manageable, PMI could easily add an additional $12 billion and change to debt for repurchases and or acquisitions.
A Hidden Tidbit In The Filing:
“We anticipate that our Board of Directors will authorize a share repurchase program based on a prudent balance between our anticipated financial needs and our goal to generate superior returns to our stockholders. Because we are a holding company, our principal sources of funds are from the payment of dividends and repayment of debt from our subsidiaries. Our principal wholly-owned and majority-owned subsidiaries currently are not limited by long-term debt or other agreements in their ability to pay cash dividends or make other distributions with respect to their common stock.”
Letter from CEO Cammilleri:
Dear Altria Stockholder:
As you know,on. ” ” the Board of Directors of Altria Group, Inc. approved the spin-off of Philip Morris International Inc., or PMI, a wholly owned subsidiary of Altria which will be the world’s most profitable publicly traded tobacco company following the spin-off. The spin-off will enable each of Altria’s international and domestic tobacco businesses to focus exclusively on realizing its opportunities and addressing its challenges. Accordingly, we believe the spin-off will build long-term stockholder value.
As a result of the spin-off, each Altria stockholder will receive one share of PMI common stock for each share of Altria common stock held as of 5:00 p.m. Eastern Time on ” ” the record date. The distribution of PMI shares will take place on ” “.
Altria [has received] a private letter ruling from the Internal Revenue Service and an opinion of counsel that the distribution of PMI common stock to Altria stockholders will qualify as a tax-free distribution for United States federal income tax purposes. You should, of course, consult your own tax advisor as to the particular consequences of the distribution to you, including the applicability and effect of any U.S. federal, state, local, and foreign tax laws, which may result in the distribution being taxable to you.
If you sell your shares of Altria common stock prior to or on the distribution date, you may also be selling your right to receive shares of PMI common stock. You are encouraged to consult with your financial advisor regarding the specific implications of selling your Altria common stock prior to or on the distribution date.
Following the spin-off, Altria common stock will continue to trade on the New York Stock Exchange under the ticker symbol “MO” and PMI common stock will trade on the New York Stock Exchange under the ticker symbol “ .” You need not take any action to receive your shares of PMI common stock. You do not need to pay any consideration for your shares of PMI common stock or surrender or exchange your shares of Altria common stock.
The attached information statement, which is being mailed to all Altria stockholders, describes the spin-off in detail and contains important information, including financial statements, about PMI.
We look forward to your continued interest and support.
Sincerely,
LOUIS C. CAMILLERI
CHAIRMAN OF THE BOARD
With all the talk of the upcoming Phillip morrris International (PMI) spinoff from Altria (MO), we seem to have forgot the future of the Phillip Morris USA (PMU) debuts this October.
PMU said on Tuesday it would start selling Marlboro chewing tobacco in Atlanta this October. PMU, the largest cigarette maker with over 50% of the US market said it planned to sell original and wintergreen flavors and long-cut and fine-cut varieties of the product in the test market.
The product will sell for $3 per tin, between the highest-priced and lowest-priced products in Atlanta. PMU said it was using the Marlboro name since smokeless tobacco users believe the brand stands for “flavor and premium quality.”
In late April I posted “Much has been said about the possibility of MO buying UST for the smokeless business. It will not happen. Why? Smokers are quite possibly the most brand loyal folks out there, chew users, not so much (I speak from experience, used to be one). What does MO have? The #1 brand of cigarettes with over 50% market share. If they introduce a new product, it will be accepted much like the instant acceptance a new Budweiser product gets by beer drinkers. It will receive a trial by chew users who will be inclined to like it as it will be perceived as being a quality product. They will have no problems abandoning their current product to try the new Altria one. The cost/benefit of a self-produced product vs. an acquired product is huge for us shareholders as it leaves billions to be returned to us.”
I love the idea of a Marlboro branded chew product. I have very little doubt it will be an immediate hit. Several people I know who chew are excited about the product and are definitely going to give it a test when it is available.
With smoking rates in decline, a new product with the Marlboro brand label will be a big boost to Altria’s (and us shareholders) coffers.
With the anticipated success of this product, a fat dividend increase, a big share repurchse, and the PMI spin all expected soon, it looks to be a very exciting fall for shareholders.
It appear that Altria (MO) is taking another step to it’s eventual spin of Phillip Morris International (PMI). Today they announced a consolidation of operations that will result in a North Carolina manufacturing plant being closed by 2010. The Cabarrus, North Carolina plant employs 2,500 workers will be closed and manufacturing will be consolidated at its Richmond, Virginia plant. The production for PMI that currently is done in Cabarrus will be moved to Europe, eliminating shipping/freight costs for PMI. Most hourly workers in Carrabus will be offered work at the Richmond facility.
The company expects total savings by 2011 to be $335 million per year. Of the savings, $179 million will go to Philip Morris International and $156 million will go to Philip Morris USA. 2007 charges will be $325 million, or $0.10 off of EPS, mostly taken in Q2 and $50 million will come later in 2007.
This is another step for Altria’s Phillip Morris USA (PMUSA) to separate from the International operations (PMI). With this move PMI will now have it’s own production facilities and be wholly functionally independent from PMUSA. It is starting to look like we may get an announcement of the intentions here at the next board meeting (along with a nice fat dividend increase)in Q3.
With the Altria board meeting, there is much anticipation that either a huge buyback, dividend increase or the PMI (Phillip morris International) spin will finally be announced. It would appear that option buyers are betting that something is coming soon.
The December 70 strike, in the money by a dollar or so, has seen more than 18,500 contracts change hands today on the long-dated option. Heading into today’s action, this strike was already home to peak open interest in the December call series, with nearly 60,000 open calls in residence.
Several blocks of 1,000 or more contracts have changed hands throughout the trading day. The largest transaction was a block of 2,418 contracts that changed hands at 11:11 a.m., trading off the bid price of $4.50 per contract. Another block of 2,250 contracts was traded at 1:56 p.m. and also traded at its respective bid price, changing hands at $4.30 per option. Given this trend, it is possible that options players are closing their positions.
MO shares have moved marginally higher in today’s trading and are within striking distance of another new all-time peak. Last week, the stock hit a new high of 72, overcoming short-term chart resistance at the 71 level.
This research is from Shaeffer’s Research
— Adjusted for items, diluted earnings per share from continuing operations up 5.1% to $1.03 versus $0.98 in 2006
So, another great quarter for “Big Mo”. Now, going forward, what do we expect? We would like to see the international operations spun off from the PMU (Phillip Morris USA). In the earnings release CEO Camilleri said:
What will we have then? In PMU, we will have a slow growing cash machine that will most likely end up crushing the yield of every other DJIA stock. It’s cash position will allow it to buy back shares on a regular basis to enhance eps growth and reward shareholders.
In PMI (Phillip Morris International) you will have a fast growing company that will begin to gobble up more tobacco companies around the world. It will also be free from US regulation since it will be headquartered abroad and have no US operations. This is a point that cannot be overlooked. The regulations that currently hamper PMI operation and the US litigation threat always present are a damper on the valuation of this segment. Once these are removed, in the word of Ralph Kramden “to the moon Alice”. In Q1 2007 PMI:
I know, I know, typically in a spin off situation the shares of the company being spun off outperform the market. But, this is no typical situation. In a normal spin off the parent company feels the segment being spun is not being fully valued in the price of the parent companies shares (see the McDonald’s (MCD) and Chipotle (CNG)) so they spin it off in an effort to return this value to shareholders and raise additional cash. These spin offs are usually fast growers than then begin trading at relatively inflated pe values and their stock tend to outperform the market on a percentage basis until their growth slows as they mature. Here we have Altria (Phillip Morris), whose stock has performed better than any stock in the history of the market getting rid of an albatross.
The acquisition of Kraft was an ill conceived plan to diversify away from the business of tobacco. It accompanied the name change from Phillip Morris to Altria. Kraft does business in a low margin low growth arena and this never meshed with the highly profitable tobacco segment. This became a drag on the shares of Altria. Kraft’s shares were hurt due to it’s association with tobacco by both the stigma on it products and the potential for the tobacco litigation effects to spill over onto Kraft.
After the split Altria shareholders will get .7 Kraft shares for each Altria share they hold. In Kraft you will hold shares in a mature company that will begin a restructuring process (shedding brands) to return to more acceptable profit levels. Plus, very important here, Kraft has no durable competitive advantage (see earlier post). Brands can make for a durable advantage (Nike, McDonald’s, Marlboro, Coke to name a few) but when you associate Mac & Cheese with tobacco, it disappears. You must be careful with your brand and nurture it, Kraft failed to do so. I am running from this stock. Who knows, it may end up turning thing around and be a success, but given the choice of owning MO or Kraft, to me it is a no-brainer.
In Altria you will have the best performing stock in the history of the stock market, paying a great dividend who is getting back to just doing what has made it great, selling cigarettes. Thanks to the Master Tobacco Settlement in 1998, the tobacco companies lawyers duped the states into essentially giving Altria a state sponsored monopoly (Marlboro has 50% market share). The states have become slaves to the tax revenues and “penalties” the tobacco companies who signed the settlement must pay (these have been easily passed on to smokers). It now behooves the states to protect the companies market share, sales and profits as their compensation is tied to these metrics. Should the companies lose ground (market share), they are entitled to refunds from the states. It is ironic, the states are trying to “stop smoking” but cannot live without the revenues those smokers provide via the tobacco companies. We are talking billions of dollars here, not millions. The tobacco companies in essence made the states defacto shareholders. Brilliant. Is it just me or did the tobacco industry’s “legal environment” suddenly begin to change after this agreement was signed and the states realized that bad legal outcomes for the companies were in turn bad for them? Beginning in 2000 Big Tobacco began racking up one legal victory after another in the courts. It is to the point now where they are exposed to almost no credible legal challenges. To quote MO CEO Louis Camilleri yesterday “This is the best litigation environment ever for tobacco companies”. Straight from the horses mouth. I am really not one prone to these conspiracy theories but sometimes “if it walks and quacks like a duck then….”.
I would expect MO to spin off Phillip Morris International soon after the Kraft spin off is done at the end of March. Then I would look for huge dividend increases (maybe a special one time dividend) and massive share buyback to reward shareholders. To quote Sinatra “the best is yet to come….”
For those “morally opposed” to owning tobacco stocks. Don’t be foolish. Why not own them, make gobs of money with them and do something good with it? Donate it to a charity, your church, pay off your kids school loans or even give it to “stop smoking” programs.
MO shareholders are going to make a lot of money for a long time, be one of them and do what you feel is the “most moral” thing with the proceeds. Maybe you can do more good in your corner of the world with it than they can do harm with their products. I am going to try….