TheStreet.com Ratings: Altria's Distraction Discount

Tobacco stocks are finally getting some positive surprises, but not all of them are benefiting equally.

Last week, California voters turned away Prop 86, an initiative that would have quadrupled that state's cigarette taxes to the highest level nationwide. With this recent win and the removal of class-action status from a $145 billion industry lawsuit in July, investors now have reason to believe that big tobacco stocks are headed for a big comeback.

These brand-name stocks are gaining popularity in core investment portfolios and with value-buyers. So even if you do not smoke, you should be happy if mutual funds you hold own these stocks. As the chart below shows, most of the stocks in the tobacco group have already posted substantial gains of 25%-40% year to date: Reynolds American(RAI) is up 39%, UST (UST) is up 39%, British American Tobacco (BTI) is up 26% and Carolina Group (CG) is up 43%. The one exception is Altria Group (MO), which has lagged with a 12% year-to-date return as of last Friday.

The price action for Altria does not seem right. As the holding company for Phillip Morris, the manufacturer with the largest market share (40%) and a growing global franchise, Altria would appear to have the most to gain from improving legal, business and regulatory trends in tobacco, assuming it can get Wall Street and investors to give it a closer look.

But Altria is a collection of different businesses, and some argue that this is a distraction to investors. It owns a sizable food business, Kraft (KFT), which represents one-third of its revenue and earnings. Altria also owns the tobacco-related operations of Philip Morris International, Philip Morris USA and Philip Morris Capital Corp., in addition to a 28.7% interest in SABMiller, the world's second-largest brewer.

Altria pays out between $6 billion and $7 billion in dividends annually to shareholders. Even though Altria receives some dividend support from Kraft, which pays out $1.5 billion in dividends (88.6% of which go to its parent company) the food business could be responsible for its stock selling at a discount.

Things could change early next year, however. Altria has announced a plan to give current shareholders a special dividend of some or all of the 88.6% of Kraft it still owns. The Altria board meets in January and may authorize a full distribution of the KFT. If so, then for each share of MO you own you might get 0.886% share of KFT.

Tracking Tobacco Shares

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What is this worth and why all the fuss about unlocking value?

We came up with three simple value scenarios -- $87 a share, $92 a share and $102 a share -- to illustrate the upside potential of the distribution. Granted, this is not a full-fledged asset valuation that takes into account every line of business, nor does it factor in recapitalization, special assessments, other major legal moves or potential ventures. So no guarantees here -- just an example of how to go about valuing a special dividend of shares from a public company.