Tobacco News and Interesting Information

Altria Group has a long history of delivering for shareholders. And its recent decision to separate its domestic and international tobacco businesses looks like a positive development.

The move hasn't excited Wall Street, where shares of Altria (MO), trading at about $69, haven't budged since the announcement was made in late August. The action admittedly wasn't a surprise, but bulls argue that it will create two dominant cigarette companies that will reward shareholders by buying back lots of stock, cutting costs and continuing to raise dividends.

Separate Strengths

Altria, the maker of Marlboro cigarettes, is the world's largest publicly owned tobacco company, with a stock-market value of $145 billion.

After the split, the new Altria will consist of Philip Morris USA and an $11 billion stake in SABMiller, the international brewer that owns Miller beer. Philip Morris International, which now generates about 65% of Altria's profits, will emerge as a separate publicly traded company.

Both new Altria and Philip Morris International will trade on the New York Stock Exchange. Altria also is expected to remain a component of the Dow Jones Industrial Average. The split is expected to take effect around March 31, 2008.

"The risk-reward with Altria is extremely attractive," says David Adelman, tobacco analyst at Morgan Stanley. He believes the two parts of the company can reach a combined price of $87 a share in the next 12 to 18 months.

Altria now carries a dividend yield of 4.4%. The company says the total post-split payout from the two entities will at least equal the current dividend.

Money for Buybacks

Altria trades for around 16 times projected 2007 profit of $4.28 a share and 14.7 times estimated 2008 profit of $4.70 a share. It has a great balance sheet with just $1 billion of net debt and annual pre-tax cash flow of $15 billion. This should let new Altria and Philip Morris International buy back lots of stock after the split. Mr. Adelman predicts that total repurchases by the two companies could reach $35 billion within 12 to 18 months.

New Altria is apt to be more of a dividend play because growth opportunities are limited in the shrinking U.S. cigarette market. Philip Morris USA controls half the market, with Marlboro alone commanding more than 40% of it.

Philip Morris International, which has a strong presence in Western Europe and Japan, is likely to continue its expansion in the developing world, including China, the world's largest cigarette consumer.