Altria Debt Tender Lowers Payments Ahead of Dividend Hike Decision (MO, RAI, VGR)

Altria Group Inc. (NYSE: MO) is lowering the average coupon on its debt, or at least that is the plan of a new debt tender offer. The American tobacco giant is commencing a $2 billion cash tender offer for certain debt maturities and the aim is to reduce the weight average coupon and to extend out its debt maturity schedule.

While the company will realize a $1.0 billion (or $0.33 per share) charge against reported earnings in the third quarter of 2012, Big Tobacco will also commence an offering for new senior unsecured debt.

The impact will cut earnings, and the company is adjusting its net income guidance lower today for 2012 so that its prior full-year earnings per share range of $2.29 to $2.33 will fall to $1.96 to $2.00 per share due to the one-time charge. As far as adjusted earnings, Altria is reaffirming its 2012 full-year guidance in a range of $2.19 to $2.23 per share. On an adjusted basis, this represents earnings growth of 7% to 9% from 2011.

As a reminder, Altria has paid the same $0.41 per share per quarter dividend for four straight quarters now, and it has traditionally announced a dividend hike at the end of August, if you track its dividend history and declaration page on its investor relations site.

Our take is that Altria has to raise its dividend again, but its 2011 to 2012 payout of $1.64 on an annualized basis already comes to 82% of the net income paid out if you adjust for the debt charge. Without that, on an adjusted basis, the $1.64 annualized dividend today comes to about 73% of the adjusted earnings before any dividend hike. If Altria somehow does not raise its dividend, the current yield is only listed as just under 4.6%. You can do better than that in telecom.

Reynolds American Inc. (NYSE: RAI) still yields more than 5% and Vector Group Ltd. (NYSE: VGR) comes with a far higher yield.

We still expect Altria to raise its dividend, even if we think the domestic tobacco giant is in a dividend bubble along with other key dividend stocks. Our problem with this current valuation is that Altria is going to have to keep raising prices on and on as the pool of smokers either dies or quits smoking and as the next generation tends to smoke less.

JON C. OGG