Por favor, no fume

Altria Group (MO) announced today its intention to spin off its international tobacco operations. This action has been long anticipated and comes on the heels of a similar spin-off earlier this year when the company ditched 89% of its Kraft Foods, Inc. unit. The Wall Street Journal tidily summarizes the potential benefits to Altria:

“Separating the international and U.S. parts of Philip Morris makes sense because while both Philip Morris USA and Philip Morris International sell Marlboro cigarettes, they face differing regulatory landscapes and growth prospects. Philip Morris International produced 831.4 billion cigarettes last year, more than four times the 183 billion cigarettes its American sibling made for the U.S. market. International revenue was $48.26 billion, compared with $18.47 billion at Philip Morris USA.”

Many shareholders cheered the long-awaited announcement, believing that the company’s constituent parts are worth more in the market as stand-alone corporations. This is likely true for Kraft and the international piece of Philip Morris’s business, but removing this cash cow from Altria Group’s pasture surely will have an effect on the company’s ongoing business. Altria is one of those unique American companies that have paid a consistent—and consistently increasing—dividend over the past half-century. Even during the long and bitter litigations regarding smoking-related illnesses, the company was able to weather large settlements due to its international successes.

Forbes.com reports that shareholders will get shares in the stand-alone Philip Morris International (PMI), just as they did in the Kraft spin-off. I suspect those shares will have a greater upside than the company’s own shares. In other words, those would likely be keepers, at least, until the rest of the world becomes as litigious as the US. As for old MO, the picture is potentially less rosy. The Journal notes that potential share buy-backs would be delayed by the spin-off “because only after the companies are finally separated would their respective boards have the chance to consider such a move.” If the transaction hits a snag, such as interference from plaintiffs in current litigation, the delay could ‘freeze’ the proceeds from the deal and cause management some headaches, especially if that money has already been marked for a buy-back, paying down existing debt, or increased product development.

Spinning off PMI leaves MO with a shrinking US tobacco business (though it is still throwing off tons of cash), a financial business that is due to close down soon, and a large stake in SABMiller PLC, the international brewer. Whether Altria can increase dividends for another 50 years depends upon how smartly it spends the money from these recent spin-offs, for one has to believe that cigarettes have a bleak future in the United States.