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Details of Philip Morris International Spin-Off Officially Announced

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January 31, 2008 – Comments (0) | RELATED TICKERS: MO

Well, it’s official.  Altria has approved the spin-off of its Philip Morris International operations.  PMI shares are will trade under the symbol PM.  Altria shareholders of record on 3/19/08 will receive one PM share for every Altria share that they own in a tax-free distribution on 3/28/08.  Altria stock will continue to trade under the symbol MO. 

Here’s some of the interesting tidbits that I was able to pull from the company’s recent quarterly results and conference call.

Dividend Policy

The Company initially plans to maintain the same total annual dividend payment of $3.00 per share after the spin-off, $1.84 of which will be paid by PM and $1.16 by Altria.

Share Repurchases

The Company announced a major share repurchase program.  Starting in April, over the course of two years Altria will buy back $7.5 worth of stock.  Starting in May, over two years PM plans to repurchase $13.0 billion.

2008 Forecast

The Company estimates that the full-year EPS for Altria (excluding PM) will increase by 9% to 11% to $1.63 - $1.67.  A higher expected tax rate, the contribution from the Company’s new cigar acquisition John Middleton, and buybacks are being taken into account in this estimate.  The latter two will have more of an impact in the second half of the year.

The Company estimates that PM’s EPS will increase by 12% to 14% to $3.11 - $3.17.

China has Finally Arrived

Philip Morris International’s negotiations with the China National Tobacco Company have been ended and the two companies are working on exporting Chinese cigarettes to European markets and selling existing Malboro products in China.  The Company has been tight lipped about what sort revenue it expects to generate from the agreement, but it has indicated that sales will commence in China during the first half of 2008.  China is a huge potential market for the company.

New U.S. Products

Altria rolled out a number of new products for the U.S. market in 2007.  In terms of cigarettes it introduced Marlboro Smooth, Marlboro Virginia Blend and six other new cigarette line extensions. These new products contributed to the Company’s 2007 retail share growth, and in Q4 they generated more than one share point of business.

Because of a continuing decline in cigarette consumption in the U.S., Altria is working on introducing a number of adjacent tobacco products.  It is rolling out the new snus and moist smokeless tobacco products that is has been testing in additional markets in early 2008.  Altria has been encouraged by these products sales so far.   Altria is also branching out into cigars.  It finalized its purchase of Middleton in mid-December.  While Middleton did not add to Altria’s 2007 results, it is expected to be accretive to earnings in 2008.  The machine-made large cigar segment is estimated to have grown at an annual rate of approximately 4% from 2003 through 2007.  The retail market share for Middleton’s top Black & Mild brand rose by 2.2 share points in 2007 to 25.2% of the machine-made large cigar segment.

The Spin-off Aligns Management’s Interests with Shareholders

The most successful spin-offs are ones that provide which align managements compensation with the interest of shareholders.  That is exactly what is developing at Philip Morris International.  Items such as shareholder return, EPS, and other operating measures will have a significant impact upon compensation, more so than they were in the past with the combined Altria. The Company even said itself in the conference call, “…one of the reasons, or one of the rationales for the separation was to align compensation of executives more closely with that of shareholders. So total shareholder return is going to be a critical element, and PMI going forward will probably have a bit more stock in the mix than has traditionally been the case with Altria.”  This is music to my ears.

Deej

Long MO 

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