What is happening with Altria (MO) and how will it affect stock?

[lowpockets]

I got a letter this morning from my online brokerage firm that dirrected me to this important notice from Altria:

http://ww3.ics.adp.com/streetlink_data/dirMOG/saF2E.pdf

Cliff Notes: After reading it, it says that Altria will be selling its Kraft Foods division. Also on 30 March, Altria shareholders will be distributed .69 shares of Kraft per every share of Altria.

Please help me finish my cliff notes...

Will I keep my Altria stock and get some additional shares of KFT for the hell of it? I think this is an extremely good thing for me, but I am not certain. I was planning on selling my Altria stock (MO) in the next couple weeks to free the money up for some other funds. If I have returned around 30% on my MO in less than two years, and I am not crazy, this extra KFT stock that I will get should really juice my returns on this stock. Thanks for the help.

[hawk59]

You will get extra shares, it won't juice your return because you already own them. Now they are just being split apart. KFT closed Friday at $32, so 0.69 shares is worth $22.08. MO closed on Friday at $85.47. Assume that on Mar 30th KFT and MO are at the same price. So the next day you would hold 0.69 shares of KFT for every share of MO you currently hold, but MO would open at $85.47 - $22.08 = $63.39. And your total investment would be unchanged.

[lowpockets]

Thanks a lot Hawk, I wasn't sure how these types of things worked. Another person told me he thought it was going to be something like $85+32... but that didn't make any sense I don't think because then MO would have shot up damn near 117 immediately, which is unrealistic on many accounts.

[bav]

The value of what you hold doesn't change when a stock splits or spins off a division. It only changes AFTER that happens as the markets start trading the separate shares.

The annoying part is that after the spinoff you now have to pay two fees to sell the holding, and enter two items on your tax return, and do all the math to recompute cost basis and split it between the two.

At least in the case of MO->MO+KFT, it's not so bad. KFT is of reasonable size and value. Splits where the parent company is 98% of the value and the spinoff is worth 2% just tick me off. I'm left with one holding worth $10,000, say, and another worth $200. Oh thanks so much.

[lowpockets]

So if I was going to be getting rid of my MO stock, it wouldn't make any sense to wait until after the 30 March distribution?

[bav]

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So if I was going to be getting rid of my MO stock, it wouldn't make any sense to wait until after the 30 March distribution?

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Well let's keep things in perspective. Paying an extra $9.99 to sell MO and KFT separately and entering an extra line on Schedule D isn't exactly an earth shattering thing. Annoying, yes, but it's not the sorta thing I'd base a major buy/sell decision on. Sell MO if/when you think it's no longer a good thing to have. Sell KFT after they spin it off if you think it'll suck while you hold MO if you think it'll rock. I wouldn't let the spinoff significantly influence my decision to sell.

Mind you, after the split there could be some unusual movement in the two stocks. The markets are going to rejigger things over the first days and weeks and MO and KFT may be a bit more volatile than normal as people try to figure out if each is fairly valued post-split. But I ain't about to try to predict if they'll go up or down. But if you are wanting to avoid any potential extra volatility (and the potential upside, too), selling beforehand might be wise. Just keep in mind MO and KFT are huge and we're unlikely to be talking about 10% changes in a week. And if people decide KFT was priced too dearly, well, that means MO must be worth more, so any downward push on KFT should see a similar upward pressure on MO. In theory.

[lowpockets]

Excellent analysis bav. I was planning on getting rid of the MO stock soon anyway so I might as well save myself the minimal effort and just sell it now. Thanks.

[Sand]

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Excellent analysis bav. I was planning on getting rid of the MO stock soon anyway so I might as well save myself the minimal effort and just sell it now. Thanks.

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Why sell? Tobacco stocks have pretty much a guarantee they will be profitable for years to come (thanks to the settlements a few years ago).

[KDuff]

How do the April options adjust for the spinoff?

[Your Mom]

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How do the April options adjust for the spinoff?

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http://www.optionsclearing.com/marke.../mar/22769.pdf