Wednesday, September 5, 2007

Altria: Hold Both US and International Shares

Altria (MO) has this way of giving you what you want and then leaving you panting for even more.

On Aug. 25th I posted "The litigation environment surrounding tobacco has not been this good in almost 20 years. Altria (MO) will take advantage of this to announce the PMI spin at the upcoming board meeting Aug. 29th."

Altria obliged and gave me the spin I wanted to stopped short of announcing the huge dividend increases and share buybacks I also wanted. They did announce an almost 9% dividend increase to 75 cents a share and made no mention of share repurchases. Altria stopped buying its shares in 2003 after it lost access to the commercial-paper market following a $10 billion ruling in a class-action smokers' suit in Illinois that limited its financial flexibility. A final decision on the timing of the spin will be announced at a board meeting Jan. 30, Altria said in a statement.

A spin would finally complete the breakup of the former Philip Morris Cos., which traces their roots back to a London tobacconist in 1847, and leave it only with the U.S. cigarette operations. Altria's cigarette ties stretch back 160 years, when Philip Morris opened a tobacco shop in London. Philip Morris & Co. was incorporated in New York in 1902 and introduced the Marlboro brand in the U.S. the mid-1920s.

The US unit, which accounts for one of every two cigarettes sold in the US, is dwarfed by Philip Morris International (PMI). The overseas division accounts for two-thirds of profit and three-fourths of revenue, and its shipments are rising.

Thomas Russo, a partner at Gardner Russo & Gardner in Lancaster, Pennsylvania said "Ultimately it is the right move". He also expects the international and U.S. companies to initiate a "generous share buyback program and pay a substantial dividend."

Louis Camilleri, 52, will take over as chairman and CEO of Lausanne, Switzerland-based Philip Morris International. Michael Szymanczyk chief of Philip Morris USA, will become Altria's chairman and CEO. Said Cammilleri, "I have seen no credible argument for keeping the segments together"

A separation of the two units will allow for savings of at least $250 million, including the closure of Altria's New York headquarters. Almost 2/3's of Altria's 600 New York jobs will be cut and some employees will be offered transfers to the Richmond, Virginia, headquarters of Philip Morris USA.

The international unit, which has the biggest share of smokers in Italy, Germany, France and Spain, may accelerate acquisitions and resume share buybacks once operating independently, Bonnie Herzog, a Citigroup Inc. analyst in New York, wrote in a note Aug. 26. Altria spent more than $5 billion on acquisitions in Indonesia and Colombia in 2005 to spur growth in emerging markets.

So, that is that backround. Now we need to know what to do going forward. This is easy, nothing. Nothing.

Take your shares in the spin, keep them and keep your PMUSA shares. Altria has been quite possibly the most shareholder friendly company in the history of the US markets, no reason to expect that to change. Cigarette's, no matter what you want to say about them are a great investment. As Berkshire's (BRK.A) Warren Buffett once said, (I am paraphrasing) "you make a legal product for pennies and sell it to addicts for dollars, a great business."

You will be getting shares in what is a US backed government monopoly thanks to the Master Settlement that will pay a huge dividend and will buy back shares by the truckload. In PMI, you will get shares in a fast growing business that throws of huge amount of cash for both acquisitions and a nice big dividend. How much of a dividend? $30 billion in leverage puts PMUSA at 1.8 times debt/EBITDA, a common industrial level and PMI at 2 times. A 75% dividend pay-out on PMUSA earnings would drive a yield of 5.4% if it traded at 14x P/E on 2008 forecasts. PMI would trade on a yield of 4.6%.

What's not to like?


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