Get Addicted to Altria Before Philip Morris Intl. Spinoff

Includes: MO, PMIR
by: Chris Krasowski

Through all the Surgeon General Warnings, packaging pictures, stop campaigns and legal battles, cigarettes continue to draw both criticisms and profits. The world's largest cigarette company, Altria (NYSE:MO), laid out plans to spin off the international arm of its Philip Morris business.

PMI (Philip Morris International), the maker of the flagship Marlboro brand, will now have complete and independent control of operations in over 160 countries. Altria will retain the Philip Morris USA division and will provide specifics of the spin-off after the annual board meeting in January.

The international business dwarfs US operations with a revenue disparity of $48 Billion to $18 Billion. Smoking is a cultural necessity in some regions around the world and despite oncoming legislation is not going anywhere, anytime soon. So smoking kills, which is really terrible, but does that make it a bad investment?

Altria has been instrumental to the Dow's resurgence over the last couple of years and has rewarded shareholders handsomely. The company recently spun-off its majority ownership in Kraft Foods (KFT), paying shareholders with Kraft Shares, and the same is to happen with PMI.

The Kraft spinoff gave investors the peace of mind of owning a solid food company without the underlying legal issues associated with cigarette companies. This will, for obvious reasons, not be the case with Philip Morris International. Investors here are getting a pure smoking play in massive international markets.

The single biggest reason for the spinoff? Valuation. The international business was being dragged down by being associated with its American counterpart, where smoking volumes are falling. Its been reported that smoking volume in America fell 3% while international volumes rose over 3%. The only way to truly extract the value in the international business is to spin it off and the thinking is that PMI is going to perform better individually than packaged with Altria in the future of cigarettes.

This is now going to become a cigarette pure play and for those investors confident in the future of smoking there will be no better investment in that industry.

So should investors buy MO now or wait for PMI? While the board meeting in which the split will be detailed is 5 months from now, Altria is still a solid stock to own and at a price under $70/share is a very reasonable investment. Why? For starters, a 4% dividend yield and an expansive array of business lines. Altria also runs the financial segment of Philip Morris and owns a stake in the producer of Miller Lite beer - among others.

Legal battles are withering away for the cigarette makers and the overhang of having to pay additional massive settlements is nearly gone. The best part as an investor is that the majority of your customers are addicted for life to your product. So you should be addicted to PMI stock, and until that's spun off, be addicted to Altria.

Disclosure: Author holds no position in any companies mentioned at time of writing