Recently Citigroup rated Altria Group (MO) a buy stating:
"We believe that MO's new management is successfully addressing the Marlboro brand's competitive positioning within menthol, and more specifically with young adult smokers."
Over the last couple of years, Tobacco stocks have been some of the most popular and best performing dividend stocks but it won't last.
Presently, the high return on the dividend of this stock is an investor's full return. Almost all the free cash flow is being paid out in dividends and very little reinvesting is taking place. With the tobacco companies continuing to loose smokers at about 4% a year, there will come a point where price increases in smoking products will not be able to offset the decline in product volume. This is a problem for Altria considering it generates 75% of its revenue from cigarette sales. A business can only grow earnings in a declining market through prices increases and cost savings for so long.
I like how "Skeptical12" describes it went he wrote in a recent article on Seeking Alpha. He wrote:
"The biggest threat Altria faces over the next several years is not new regulation, increasing litigation, or declining smoking rates. It is the prospect of rising costs of capital. The company's buyback plan is obviously financed with pre-tax capital, but Altria has $14 billion in long-term debt, and the company was forced to recently repurchase $2 billion in bonds this past quarter and to lower fiscal 2012 guidance by nearly 10%."
It seems to me that the Tobacco companies may have seen better days. I do not see them moving up significantly much longer. There is no other catalyst yet available to keep this industry moving up.
After peaking in August, Altria has been in a bearish pattern and recently has formed what looks like a descending triangular pattern. Usually, these are bearish in nature and are formed in a down trend as a continuation pattern. But even though they usually form during a downtrend as a continuation pattern; there are instances when descending triangles form as reversal patterns at the end of an uptrend, but they are typically continuation patterns. Regardless of where they form, descending triangles are bearish patterns that indicate distribution. Both the RSI and the MACD indicators tend to support the bearish move as the RSI spends most of its time below the '50' level and the MACD below '0.' I would want to see a positive divergence taking place in the stock to show upward trend possibly coming but it just isn't there.
The Options Play
The stock is presently trading at 33.12 and I am not expecting it to move up soon. For this reason I am going to play the trend down.
- Buy the January 2013 put with a strike of '33' (priced at $1.21)
- Sell the January 2012 put with a strike of '32' (priced at $0.76)
- Net Debit to Start: $0.45
- Maximum Profit: $0.55
- Maximum Risk: net debit
- Maximum Length of Trade: 4 months
Reasoning behind the Trade
- Play the trend
- Shrinking industry and the revised downward revenue for the company is not positive
- No catalyst exists for this industry to turn around