I have had quite a few posts on MO recently and this is a product of both earnings season and investor meetings, not a myopic focus on one stock. There were a couple of very important items discussed and disclosed at the annual meeting today. Here they are with opinion.
CEO Camilleri: “Over the next several months, we will continue to carefully and diligently examine the benefits of a spin-off of Philip Morris International (PMI) and other possible value-enhancing options to decide the optimal long-term strategic course to follow.”
Before the Kraft (KFT) spin there was no mention in any earnings report or announcement of the possibility of a spin. The very fact that Camilleri is even discussing it all but assures the spin shareholders want. It was also discussed on the earnings call last Thursday. It needs to be pointed out here that PMI is set up to run as an independent company so the actual spin will only be a paper transaction, not a logistical one.
Shareholder Returns
- Our total shareholder return was 19.9% in 2006, assuming dividend reinvestment, outperforming the Standard & Poor’s (S&P) 500 Index for the fifth consecutive year.
- Over the past five years, our total shareholder return has been an outstanding 142.6%, significantly ahead of the five-year total return for the S&P 500 Index at 35%.
New Products For PM USA Growth:
To enhance its growth profile, PM USA embarked on an adjacency strategy. It took the first step toward this goal in 2006 with the test market launch of Taboka, a smoke-free, spit-free tobacco product that provides a new way for adult smokers to enjoy tobacco in a pouch. PM USA has learned much from this test. While I cannot share our findings for obvious competitive reasons, I can state with confidence that these learnings will be translated into further action, and that a number of initiatives will be announced as the year unfolds.
Much has been said about the possibility of MO buying UST for the smokeless business. It will not happen. Why? Smokers are quite possibly the most brand loyal folks out there, chew users, not so much (I speak from experience, used to be one). What does MO have? The #1 brand of cigarettes with over 50% market share. If they introduce a new product, it will be accepted much like the instant acceptance a new Budweiser product gets by beer drinkers. It will receive a trial by chew users who will be inclined to like it as it will be perceived as being a quality product. They will have no problems abandoning their current product to try the new Altria one. The cost/benefit of a self-produced product vs. an acquired product is huge for us shareholders as it leaves billions to be returned to us.
Working With The FDA:
PM USA continues to be the only major cigarette manufacturer supporting regulation of the tobacco industry by the U.S. Food and Drug Administration (FDA). This February, legislation was introduced in the U.S. Congress that would grant the FDA comprehensive regulatory authority over all tobacco products sold in the United States. We believe that this proposed legislation offers the prospect of effectively reducing harm and providing real solutions to the many complex issues involving tobacco.
Altria and Philip Morris USA (PM USA) believe regulation of tobacco products by the Food and Drug Administration (FDA) would establish a comprehensive national tobacco policy that could potentially create a competitive framework within which manufacturers are focused on reducing the harm tobacco use causes. The companies believe regulation would also bring predictability and clear standards to the tobacco industry in the United States.
On February 15, 2007, Senators Edward Kennedy (D-MA) and John Cornyn (R-TX) and Representatives Henry Waxman (D-CA) and Tom Davis (R-VA) introduced legislation to grant the FDA broad authority to regulate tobacco products. Altria and PM USA strongly support this bipartisan legislation and urge Congress to take quick action on the Kennedy/Cornyn and Waxman/ Davis FDA bills.
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Regulation of nicotine. The FDA would have authority to reduce nicotine yields and to reduce or eliminate harmful smoke constituents or harmful components of tobacco products;
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Authority for the FDA to regulate descriptors such as “light” and “low tar”;
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Changing the language of the current cigarette and smokeless tobacco product health warnings, enlarging their size and granting FDA authority to require new warnings in the future;
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Full disclosure of ingredients added to tobacco products;
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Authority for the FDA to require ingredient testing and to remove harmful ingredients;
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Authority for the FDA to do more to prevent minors from using tobacco products;
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Authority to establish standards for products that could potentially reduce the harm caused by tobacco products and to define the appropriate ways to communicate about these products; and
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A ban on the sale of candy and fruit-flavored cigarettes.
The Best Part
Camilleri: “Our ability to generate cash flow remains undiminished. Over the four-year period from 2006 through 2009, we project that cash flow will reach a cumulative level of some $41 billion. We plan to continue using our strong cash flow to reward you, our shareholders.”
This stuff is really fun folks…..
