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.
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.
Combined, the two companies would be able to spread the financial power of alcohol, the growth of vaping, 8% per year, and the hope of pot profits to a global market.
The two companies had combined net income of about $15 billion last year. Based on the relative values of the two companies, that would be spread across about 2.5 billion shares outstanding if they merge.
The Bottom Line for MO Stock
Cigarettes, pot and alcohol can all kill people, but only the tobacco business is in a long-term decline.
Adding the possibility of marijuana and the reality of beer to the global mix offers at least a hope of growth and should protect the dividends of both companies. Altria’s vaping unit can spread globally, while Philip Morris’ electronic cigarettes would get a bigger lift in the U.S.
Neither of these companies has been a great investment lately, even with Altria’s rising dividend, because their valuation declines have both been bigger than the dividend income. If that can be arrested, shareholders will be pleased.
Investors looking for income will hold their noses, cash their checks and hope for global growth out of Altria’s diversification efforts. If one plus one can equal a little more than one, that’s all they can hope for.
Dana Blankenhorn is a financial and technology journalist. He is the author of the mystery thriller, The Reluctant Detective Finds Her Family, available at the Amazon Kindle store. Write him at firstname.lastname@example.org or follow him on Twitter at @danablankenhorn. As of this writing he owned no shares in companies mentioned in this article.