Altria's announcement Wednesday had been widely anticipated by Wall Street as the first step in a restructuring plan designed to increase shareholder value.
The distribution of Altria's 89 percent stake in Kraft to Altria's shareholders will be made on March 30 to shareholders of record as of March 16, Altria said in a statement.
Altria will distribute about 0.7 of a share of Kraft for every one share of Altria. The exact ratio will be determined on the record date.
Kraft, based in Northfield, Ill., has been trading on its own since a 2001 public offering that left Altria with a majority stake in the business.
Altria said the split boosts Kraft's ability to make acquisitions, allows managers to focus their respective businesses and gives both companies greater debt capacity.
"Once they spin off Kraft, you'll be left with a tobacco business operating in a strong environment, with a vastly improved legal environment, substantial free cash flow and an unleveraged balance sheet," said Charles Norton, portfolio manager of the Vice Fund.
Analysts and investors have eagerly awaited the restructuring since plans for it were outlined in November 2004.
Altria has grown more comfortable with its tobacco litigation risk and Kraft's readiness to stand alone, which allowed them to proceed.
"I am extremely pleased to announce the spin-off of Kraft today, a major step in our commitment, announced more than two years ago, to deliver superior shareholder value," Chief Executive Louis Camilleri said in a statement.
Kraft, based in Northfield, Ill., subsequently announced that Camilleri will step down as chairman of its board of directors March 30 and will be replaced by Kraft CEO Irene Rosenfeld. Camilleri will continue to serve on the board.
Analysts have said the break-up is not likely to face any significant legal challenges, which could be launched by plaintiffs in lawsuits pending against Altria and Philip Morris USA. Any challenge, legal analysts say, would need to prove that Altria would be unable to pay potential legal damages if the Kraft spinoff is completed.
Next, analysts expect the New York-based company could split its domestic and international Philip Morris tobacco divisions later this year. Norton believes that would be followed by "monster stock buybacks" of as much as $40 billion and that the sum of the parts, once they are broken up, will be worth about 20 percent more than where Altria is currently trading.
"The important thing to bear in mind in our view is that this is really just the beginning of a process from Altria to increase shareholder value," Norton said.
Philip Morris USA is the biggest cigarette maker in the nation and holds nearly half of the total market, selling the Marlboro, Virginia Slims, Parliament and Basic brands.
Altria also said on Wednesday that its fourth-quarter profit rose 29.3 percent on the strength of acquisitions, favorable currency comparisons and pricing strength internationally.
Net income increased to $2.96 billion, or $1.40 per share, in the October-December period from $2.29 billion, or $1.09 per share, a year ago.
Revenue in the quarter rose 3.7 percent to $25.4 billion from $24.49 billion a year ago.
Analysts polled by Thomson Financial had predicted fourth-quarter net income of $1.23 a share on $18.23 billion of revenue. The earnings estimates typically exclude one-time items.
The company projected that earnings per share for this year will grow in the mid-single-digit range.
Meanwhile, Kraft said Wednesday its fourth-quarter earnings fell 19 percent to $624 million, or 38 cents per share, down from $773 million, or 46 cents per share, a year earlier. Revenue fell 3 percent to $9.4 billion from $9.7 billion.
Altria shares fell 20 cents to $87.34 in afternoon trading on the New York Stock Exchange while Kraft shares rose 2 cents to $34.85. Altria shares have traded in a 52-week range of $68.36 to $90.50 while Kraft shares have traded between $28.43 to $36.67 over the past year.