Philip Morris Cashes In on Indonesia, But Will the Move Pay Dividends?

Source: Sampoerna.

One of the huge benefits of Philip Morris International is that it gives tobacco investors exposure to the entire global market. With a huge presence throughout the world, Philip Morris can often overcome economic headwinds in one region with offsetting success in another. Yet having a complex corporate structure sometimes requires regulatory moves to comply with local restrictions, and Philip Morris is in the process of making a key strategic move with its Indonesian business that could have ramifications for income-hungry shareholders. Let's take a closer look at what Philip Morris International is doing in Indonesia and why U.S. investors should pay attention.

Profiting from SampoernaPhilip Morris International works in the lucrative Indonesian market through its subsidiary, Sampoerna. In a somewhat unusual move, Philip Morris allowed Sampoerna to continue trading on the public stock market in Indonesia even though the international tobacco giant owns more than 98% of Sampoerna's shares. One reason for this is that Sampoerna is one of the biggest companies in Indonesia, with a market capitalization well above $20 million even despite the declines in the Asian markets recently. This arrangement worked well for Philip Morris as it benefited from having commanding market share in the world's third-largest cigarette market.

However, Indonesian stock market regulators recently created a new wrinkle that required Philip Morris to take action. Under a new rule that's set to take effect at the end of January, Sampoerna will be required to make at least 7.5% of its outstanding shares available for public trading. With less than 2% currently available, Philip Morris has said in the past that it would need to consider various strategies for complying with the coming rule.

Last week, the deal started to gain speed, with Philip Morris announcing that Sampoerna had set a price range in its offering of shares through a rights offering. According to the company, Philip Morris will set the price for the rights offering between 65,000 and 77,000 Indonesian rupiah, which works out to around $4.50 to $5.25 in U.S. dollars. After the offering is completed and the rights exercised, the expected impact is that roughly 270 million new shares will be available for public trading, and Philip Morris will end up with about $1.4 billion if demand for the offering proves as strong as expected.

After typical required formalities, the rights offering should be completed in October. Although the Indonesian stock market has said that it might end up delaying the imposition of the 7.5% requirement until after January, it's not expected to affect the Philip Morris deal, and regulators are likely to look closely at how the offering goes to see if other companies would stand a good chance of having success in similar strategic moves.

Can dividend investors catch a break?For Philip Morris shareholders, the Sampoerna deal might not seem like a very important move. Yet one outstanding question is what will happen to the proceeds from the rights offering and subsequent sale of Sampoerna stock. Some money will go toward repaying outstanding obligations of Sampoerna, and given that Philip Morris originally paid about $5 billion in 2005 for its 98% stake, there may be tax implications for the company as well.

Nevertheless, some Philip Morris investors are hopeful that the company will share part of its windfall with them. Earlier this month, Philip Morris gave shareholders the bad news that it would only be able to raise its quarterly dividend by 2% this year, representing a huge slowdown from much faster dividend growth rates in the past. The company has had to deal with huge currency headwinds stemming from the strength of the U.S. dollar that have held back its earnings, and every increase in the dividend boosts the company's payout ratio beyond its comfort zone.

If Philip Morris considers a special dividend with some of the proceeds, it could go a long way toward reassuring dividend investors that the company sees a sustainable path for long-term income growth. It wouldn't necessary have the same impact as a regular-dividend increase, but the one-time nature of the transaction would argue for a one-time payout if Philip Morris chooses to go in that direction.

Philip Morris has achieved great success in Indonesia, and the sale doesn't indicate any change in the company's commitment to the tobacco market there. For dividend investors, though, the offering could well represent a great way to recover some more investment income from their holdings in Philip Morris stock.

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