Tobacco companies will always have a negative public stigma but the siren-like call of a dividend rate of 5.5% from companies like Altria Group (MO) continue to be addictive to income minded investors. The company looks like a good buy right now according to some analysts.
Stifel Nicolaus upgraded Altria Group from Hold to Buy and announced a $36.00 price target.
"We've been increasingly attracted to the stock as it pulled back from the mid-$30 range and believe this represents a good place for investors to begin building positions. The outlook for Altria's business remains solid, in our view, as we estimate a continuation of the 8% EPS growth trajectory for the business with upside potential throughout the year ... We believe the stock has solid downside support afforded by its current 5.5% dividend yield which remains at a significant premium in relation to the 10-year treasury for example."
Do Investors have to worry about shrinking cigarette sales?
High dividend rates continue to look very attractive in this economy. 10 year Treasury notes today were at 1.82% (ICAPSD: 10_Year) while dividend rates for MO are 5.5%. So what do you think investors are interested in? Money will continue to flow into the company as long as returns continue to be good.
What about the continued loss of cigarette sales? Back in the '60s, more than 40% of Americans smoked and today that number is below 20%. The stigma of smoking is the reason for this. There is government pressure to encourage people to stop smoking, the high cost of healthcare and lung cancer association that has attributed to the continued decline. 26.2 million Men (23.5 percent) and 20.9 million women (18.1 percent) are presently smokers.
Altria offers other tobacco products (including cigars) and might be able to compensate for the drop in cigarette sales with other tobacco products. Despite the drop in consumption, revenues from cigarette sales rose. Price increases in tobacco generally compensate the drop in demand. For this reason, revenues tend to rise even if most of the growth in price will be deferred to pay excise taxes.
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So what are investors supposed to do about these statistics?
I am of the opinion that investors are interested in making money and despite the stigma, tobacco investments will not be going away anytime soon. It is all about the dividend and will continue to be as long as bond yields remain so poor. One can continue to invest in Altria, or look at a company with even more appeal like Philip Morris (PM). It may be a better long-term choice because it has a global market. Smoking statistics point to more people smoking world wide with the two largest markets being China and India. With a respectable 3.8% dividend rate (Yahoo Finance), it looks like his one will be around for a long time.
It's all about the dividend and will continue to be all about the dividend.
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Technically Speaking
After a brief consolidation period in the fall, MO continued to move down until mid November. Since that time, the stock has looked like it is consolidating again, but this time in a symmetrical triangular pattern. This pattern is usually a bullish continuation pattern, but sometimes it is a reversal pattern also. We can identify the lack of direction watching MO move between the upper and lower Bollinger bands as highs get lower and lows get higher. If I observe the RSI indicator I can see that it continues to move closer to the middle. The same thing is happening to the MACD as it consolidates to the middle, waiting for the stock to pick a direction it moves in.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
