Altria Group, Inc. (MO) has dipped quite a bit over the last couple of weeks. There is a reason for this since cigarette sales seems to have stagnated. But I do not believe this slowdown is something that will stay on for long. The investing atmosphere is still favoring steady growth companies with good dividends and Altria is one company that falls into this group. For this reason, I am looking at the company and putting together a bullish medium-term income strategy as it pulls back.
Beating 2Q2012 Forecasts
The 2Q2012 earnings for Altria nearly tripled from a year ago, coming in at $1.23 billion and $0.60 per share. Analysts projected $0.57. Needless to say, both figures beat analysts' forecasts - but numbers are deceiving. Beating forecasts was not because of increased sales, as much as an increase in price. Altria's current yield is about 5.3%. Altria's Phillip Morris USA business raised prices on all cigarette brands by 6 cents a pack, the third increase in the past year. So even though it beat second quarter figures, it does not tell the real story about sales.
Will the Price Stay Low?
The low interest rates and sub-par Treasury bond yields continue to create an atmosphere where long-term investors are looking for high-yield companies with strong earnings. Tobacco companies have this type of reputation. They are considered to have some of the safest dividends during hard economic times and it is for this reason that investors will consider turning to these companies. Asia continues to be a hot bed for tobacco companies too. Despite the current economic slowdown, tobacco sales in China during the first six months of the year rose 2.81 percent to 1.31 trillion cigarettes from a year ago, recent data from the State Tobacco Monopoly Administration showed. China has more than 300 million smokers.
I know prices are low, but I do not believe that Altria will continue down this path indefinitely. The tobacco sector provides a safe defensive play against an uncertain economy. It has a consistent revenue stream from a product demand that is easily sustainable, even in uncertain economic times like today. Tobacco companies know they rely on income investors and tend to be "shareholder- friendly" with attractive dividends that won't go away for any reason. This is a slow steady growth industry that will keep high dividends and continue to attract invests. Altria Group has dipped before, but has turned right around and continues to move up. I expect the same in the future.
Altria Group has had a nice conservative and steady run up, but I believe that the chart is showing us that the run might be complete for now. There are a couple observations I would like make, the first one being the bullish run from earlier this year. Typically, according to my observations, a stock has two strong runs before it experiences a pullback. This company's runs are easily identified. After the second run, the pullback occurs and the stock is in that right now.
This is a significant pullback as can be seen by how far it has dropped below the 50 day MA. The drop is steep so I do not expect it to continue at this pace. The MACD gave us an indication something was coming as it started to form a negative divergence on the second move up. Altria always has pullbacks before it continues up. I am not sure how long this one will last. The RSI has indicated it bounced off the '30' line - which usually indicates a move up again.
The Options Play
- Buy the March 2013 call with a strike of '35' (priced at $0.96)
- Sell the March 2013 call with a strike of '36' (priced at $0.59)
- Net Debit to Start: $0.37
- Maximum Profit: $0.63
- Maximum Risk: net debit
- Maximum Length of Trade: 7 months
Reasoning behind the Trade
- Investing environment favors defensive high dividend stocks like Altria Group
- Longer-term trade protects us from time decay.
- Stock may go down a bit more.