In This Article:
Little more than a decade after splitting to “achieve their full potential,” cigarette makers Altria (NYSE:MO) and Philip Morris (NYSE:PM) are talking about getting back together. PM and MO stock are both struggling in a dying — or at least very sick — industry.
Between them, the two companies that split the global Marlboro brand have a market cap of $200 billion, more than Comcast (NASDAQ:CMCSA), and bring the latest advancements in nicotine technology under a single roof. Philip Morris has been seeking growth through iQOS smokeless cigarettes. And Altria has a stake in Juul, a vaping company, along with big investments in marijuana and tobacco.
Still, the remerger would deliver no premium to either company. Investors have a right to ask why this is happening.
InvestorPlace - Stock Market News, Stock Advice & Trading Tips
One Plus One Equals One?
Make no mistake, this merger happening because the tobacco business is dying and both companies want to protect their dividends.
Cigarette companies are dividend monsters. Philip Morris shareholders get $1.14 of income each quarter, a yield of 6.36%. MO stock owners do even better, an 84 cent per share dividend yielding 7.13%. This at a time when a government bond is yielding less than 2%.
But income means nothing if your principal is going away. MO stock is down almost 30% from where it was two years ago. Philip Morris is down 40%.
Altria operates in the U.S. and has been aggressively moving away from dependence on tobacco in recent years.
It got nearly 10% of Anheuser-Busch InBev (NYSE:BUD) in 2016, plus $5.3 billion in cash, after that company bought SABMiller. It got the SAB stake in 2002, before the Philip Morris-Altria split, when it sold Miller Brewing for $5.6 billion.
Altria put $1.8 billion into Cronos Group (NASDAQ:CRON), a leading marijuana company, last December to get a 45% stake. Cronos opened for trade August 28 with a valuation of $3.7 billion, close to where it was at the time the deal was announced.
Then Altria spent $12.8 billion buying 35% of Juul Labs last December, valuing the vaping company at $38 billion. At the time Juul had 75% of the e-cigarette market.
The Failed Split of PM and MO Stock
The original idea behind the 2009 split was that Philip Morris would have a growing international market while Altria would try to capitalize on a declining U.S. market.
While Philip Morris sales are still growing, they’re only up 10% in the last three years, from about $26.8 billion to $29.5 billion. Altria sales, meanwhile, have been nearly flat, at slightly over $25 billion per year.