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The Downtrend Is Finally Broken For Altria

Mar. 04, 2021 6:12 AM ETAltria Group, Inc. (MO)226 Comments
Matthew Zeets profile picture
Matthew Zeets


  • Altria has been going in a very structured downtrend for nearly four years.
  • It seems it has finally broken out of this range, and it makes the company viable to bounce back hard.
  • Growth stocks have had their day in the sun for quite a while now. I see 2021 as a great time to be defensive.

I doubt Altria (NYSE:MO) needs any introduction, but just in case you don't know, it is basically the king of American tobacco, owning the rights to Marlboro, Copenhagen, Skoal and Black & Mild in the US. It has also diversified by having large minority stakes in the brewing giant Anheuser-Busch InBev (BUD), the large cannabis company Cronos Group (CRON), and the e-cigarette maker Juul.

Altria had been stuck in a firm downtrend for almost four years now. It looks like it has just broken out of that very tight downtrend within the last six months. This makes it a perfect time to visit it as an investment and see how it would fit into a portfolio overall. Here are those declines the stock price has seen for several years now:

The most impressive part about Altria is their free cash flow growth through all parts of the business cycle. Here is the free cash flow over the last 10 years:

You'll notice that Altria went from around $2.5B in FCF back in 2011, up to $10B in mid 2020. That is much, much more than any inflation. And that is all happening when the market has been worried about cigarettes falling further and further out of the mainstream. At least I assume the market has been worried about that, because the price of Altria has been dropping for the last 4 years, despite free cash flow continuing to impress. Let me show these overlaid for a more stark contrast:

So what happens when you take a business that churns out continually increasing cash flows and send the stock price lower for 4 years? You of course get a deep value situation. Some could argue that Altria was overvalued in early 2017 or that

This article was written by

Matthew Zeets profile picture
I was taught the value of investing and the power of compounding money at a young age by my dad and aunt. My dad helped me start a CD when I was about 10 to get better returns off my Christmas and birthday money. I started investing in the stock market when I was in grad school for Computer Science in 2008/2009. Stocks had dropped so far, it seemed like too good of a buying opportunity to me to pass up. I hardly knew anything about individual stocks, but luckily my timing was good and I saw multi-bagger returns on almost all my stock picks over the next few years. I've been interested in the stock market ever since and have done research on Seeking Alpha the last 5 years, as well as taking a couple online business/finance courses.A farting horse will never tire; a farting man is a man to hire.

Analyst’s Disclosure: I am/we are long MO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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Comments (226)

Matthew Zeets profile picture
Well the news yesterday that the Biden administration is going to set a nicotine reduction policy until all cigarettes have a non-addictive level of nicotine in them wasn't super surprising to me. It was a tad surprised it came so early in his administration considering how many other issues they are dealing with and how smoking has already been falling for years.

On the good news front, Piper Sandler came out maintaining their Overweight rating and have a $57 price target after this news. I can see their reasoning in that Altria has already been transitioning away from cigarettes for years and it isn't a rule that can go into effect immediately anyway:

Veritas1010 profile picture
@Matthew Zeets

Thank you Matt.
Are they retiring shares that they are buying back and have they started buying back? Nothing worse than buying back shares at higher prices. They should have bought back 2 billion worth under 45.
Matthew Zeets profile picture
@Proud Patriot
Sometimes these things seem like a company is buying back at a high price, but you should keep in mind that a company is never going to be able to buy in that sort of bulk without sending the share price up considerably. It's not like they can just put in a buy order for 50M shares the way a retail trader can for 50 shares or 5,000 shares.

Based on trading volumes, I think it would take several months for MO to buy back that many shares without sending prices up a lot. In fact, I wouldn't doubt if them buying back shares is what has been sending the shares higher some over the last month. Perhaps if they had started buying back last September or something, that's when we would have seen the shares start going higher at the rate they have been recently.

Also $52 may seem like a lot after sitting between $35-$45 for so long, but it always matters what happens in the future. If they manage to get back to $80 within a few years, the shares bought at $52 will seem basically as good as those bought at $45.

One good example of this is when people complained about Game Stop buying back so many shares at $5 in 2019, when they could have gotten them under $4 or maybe even under $3.50. Game Stop is surely worth considerably less than what they now trade at, but I think they are worth more than what they bought them back at in 2019.

Another example would have been if Apple had stopped buying back shares as they continued to rise. They have put a lot of money into buybacks since 2013. It may have seemed too late in timing after they had already risen from their relative lows in 2016 to new all time highs in 2017. However, Apple actually started putting more money into buybacks in 2018 and 2019. Looking back it was still a good price to continue buying back shares, even if they could have gotten lower if they had put more money into it a few years previous.
Addams Family Trust profile picture
surprised to see the drop today just before ex date. timely news? extra big drop tomorrow?
@bagholder1 stock will open down by amount of dividend plus or minus any market action
Addams Family Trust profile picture
@TheRagingBulll i know capture is usually a zero sum game esp in big names but wonder if it still applies in times of volatility. open at 49.44 was more of a 2% drop. happy to hold

Lots of people get out right before X dividend and then buy back lower and essentially get the equivalent of a immediate dividend and more shares than they would have gotten had they stayed in. Looks like it worked out for them this time.
Funny no fancy articles for weeks while MO breaks out
@jesser6584 true believers need no stinkin articles!
Anyone that bought when this article published would be up 14% and in line to go ex dividend in a few days. Very good call.
Matthew Zeets profile picture
Thanks. I got lucky with the timing, but I do hope it means the markets are ready to start judging MO on future prospects again and stop punishing them for past mistakes.
@Matthew Zeets Value Line, in their weekly selection & opinion newsletter, just added MO to their Portfolio III 2/3 weeks ago. That might have added to the boost, certainly didn't hurt. But your breakdown dives much deeper than the write-up they included. (They mention them again in this weeks (3/26) portfolio summary.)
Matthew Zeets profile picture
Oh, good to know. Thanks for sharing. In general I do feel like analysts are starting to get a little more bullish on MO.
@Matthew Zeets

Great call on the broken downtrend......what do your charts tell you know? Are we going to slide under 45 again or slowly add bricks to the castle?
Matthew Zeets profile picture
@Proud Patriot
Haha, thanks but I honestly was calling it as meaning it was more likely that we'd go to $50 in the next year than $40. I got extremely lucky that it started going up so soon after my article. I'm really not a great technical trader. I just noticed MO as being one of the tightest downtrend patterns I've ever seen, so it seemed very bullish when it got out of that.

As to the future, I think if MO can keep up any sort of growth or make progress with CRON in the marijuana markets, they could be re-priced much, much higher, since I think that would be more deserving of a 4-5% dividend yield. That being said, it could be a long road to that point even if things go well. No clue if the price just keeps going higher for a while or if it pulls back some soon.
22 Mar. 2021
Seems too much too fast but I'm not unhappy with it. I keep expecting a pullback below $50 though, or perhaps that's long ago in the rear-view.
Matthew Zeets profile picture
Yeah the great thing about a company with a fantastic dividend like MO is that you really don't have to root for it to go higher anytime soon. If it pulls back and continues on with a slower march higher, I'll be perfectly fine with that.
Incomeiam profile picture
If you have the patience you will be rewarded handsomely by this stock.
Baron Von Wolfcastle profile picture
Bought in at 40.60...up about 25% plus a dividend.
@Baron Von Wolfcastle

At that buy-in price, are you planning to hold a long time?
Baron Von Wolfcastle profile picture
@Proud Patriot I haven't decided yet. The 25% does give a nice cushion while I decide.
@Baron Von Wolfcastle The dividend gives you a very good yield at that price! At this point, I plan to hold all shares purchased at $50 and below. If it makes it back to the $60 range, I'll trim. Long MO.
Long MO
Greenhorn Investor profile picture
Nice to see MO methodically climbing in this market environment. Long MO.
Matthew Zeets profile picture
It has been a nice couple of weeks. Go MO!
joe52us profile picture
23,300 strong. Also heavy into Pm and T. Dividend on these companies make my life good. Bought a new Lincoln with my last pm and mo DIV.
Incomeiam profile picture
@joe52us , I hope to be there soon. Long MO, PM, T, CVX, ENB, ABBV among a few others.
@joe52us I have a few hundred more than that. Was thinking about booking the dividend and then selling and buying about 40,000 shares of T for the dividend and to stay in longterm since the price is low BUT there is no dividend increase coming or just a meaningless one, which is fine but I'm scared T will cut the dividend next since they just froze it.
Addams Family Trust profile picture
almost 50. up a lot. what's a good trailing sl for this?
@bagholder1 going to $60
I tend to agree with Warren Buffett when he explained how growth and value are joined at the hip; growth is an essential part of the calculation of value. MO is a growth stock when purchased at discounted values, and even though smoking rates are declining (though not necessarily total number of smokers due to population growth), MO has both pricing power and an ability to take advantage of cannabis and non combustables... Juul took a hit but its not dead. Long big tobacco.
No one is talking about this yet, but vaping is an exploding trend. But not with juul anymore due to its low quality. People are buying throw away vapes or e juice in a bottle to refill. These smoke shops where you would buy Nat Sherman’s, which mo owns, or other products fit right into the distribution pipeline. Mo, pm, & bti need to start acquiring vape companies that sell the e juice. Mo needs to focus on juul, e juice, throw away vapes, non combustibles & marijuana going forward. I have many friends that have quit cigarettes & vape or use the zyn or velo pouches
Insouciant Investor profile picture

IMHO, right now BTI is the best positioned in the vape and oral nicotine categories.

BTI has Vuse and Velo



In the UK BTI just released a new Vuse option for vaping CBD.


Right now PM is way ahead in the heat not burn category but has not gotten started on vaping and oral nicotine.

MO has Juul but doesn't own the whole company yet and has a lawsuit by anti-trust dept to still deal with. MO does have On! for oral nictotine but they don't have the global distribution of PM and BTI. So, will probably be mostly concentrated in the US.

Anyway, best option is to just own all three, as all three are great companies. Own all three and you have the nicotine sector covered globally (and in the US which is the best market in the world).

Just throwing this out there. I think as time goes on we will see all three of these companies stretching into more pharmaceutical areas. They will be selling various kind of botanicals that are administered through the lungs. Both recreational and medical sectors.

Things like this (which PM is an investor in):


IMHO, PM is the farthest along. They are saying by 2025 that 50% of revenues will come from the new categories (i.e. not cigarettes or snus). Also by 2025 they expect $1 billion to come from non-nicotine products like that Syqe Medical device.
Matthew Zeets profile picture
Well that is always useful to hear about, as I don't vape, and wouldn't know what the landscape looks like. It does sound a little commoditized to me though. I assume that's why they went after Juul. For a big company like Altria, you're always looking for the product that can actually differentiate itself, since if you get into the game of disposables, even if you buy up 10 different brands, what's to stop another 10 from popping up.

The way I see it, they really need a recognizable brand name to keep pushing. Unfortunately Juul got known for the wrong things, due to so many dying from vaping THC from a large variety of sources. Not even really Juul's fault. They were just the most recognizable name at the wrong time. Maybe that can still be turned around with time.
The strength of MO’s stock performance so far in 2021 has been phenomenal. I first purchased MO in 2015, so although MO initially increase in price until 2017, it was in a strong downtrend for almost four years before finally bottoming last year.

If there is a reversion to the mean, MO could continue rising for some time. At the current dividend payout of $3.44/share, MO would have to rise above $68.80 before its dividend yield falls below 5%. Based on recent earnings estimates for 2021 and MO’s stated target dividend payout ratio of 80% of earnings, MO will likely raise its dividend to $3.66-3.68 in October. If the dividend is raised to $3.68, MO would have a yield of 5% at prices up to $73.60.

I could be wrong, but I think this rally in MO could continue for some time.
Investing for Freedom profile picture
@Jim Investor I agree with you. My expectation for the Oct. dividend raise would be $0.90/quarter/share. Let's hope that will happen.
Matthew Zeets profile picture
@Jim Investor
Well said. I agree completely.
As previously stated by some I think the buyback may be partly responsible for the rally in MO. In addition MO's lockup on BUDs shares expires 10/2021. MO will have the option of liquidating the shares and could use the billions of dollars to buy back their own stock saving the company potentially billions of dollars in dividend payments over the years. Selling out BUD would not create a capital gain issue for MO since they have a large loss on JUUL which would offset the gain.

I realize many shareholders prefer MO keep their BUD stake but keep in mind BUD suspended the dividend while as far as I know MO has increased the dividend annually for decades. Investors who have reinvested dividends for those decades have become wealthy. MO is primarily a nicotine delivery company which is their expertise.

As an investor who reinvests MO dividends through DRIP in an IRA and buys MO in a taxable account when the shares seem cheap I would prefer MO stayed around 40 forever as long they increase the dividend annually at their average historic rate. Obviously that won't happen but it is my dream.
@xbureaurat Extended periods of undervaluation coupled with increasing dividends (reinvested) is probably the easiest way to attain wealth passively. Since those dividends are fully covered by profits, the only real end game I see is if cigarette prices (i.e. excise taxes) rise so much that profits start to slide year over year. Sure, there's always a risk of a total ban, but I can't imagine one being effective.
@xbureaurat How much cash would they get if they sold their BUD stake?
Matthew Zeets profile picture
Very well said and I did not realize that about their BUD lockup. I agree that it would make a lot of sense to buyback their own shares instead of keeping the BUD stake. It would give them an even better payout ratio, especially b/c their BUD stake is big enough, they should be able to purchase 10-15% of their own shares back. It would leave them a little less diversified though.
Convoluted profile picture
It’s not too late to add to the LEAP 40/30 short put spread (2023). I suppose though you could look at the 45/35 now.

At some point, the big gains in the put spreads will unite with short call spreads and we shall give thanks to the tobacco leaf.
Insouciant Investor profile picture
Did marijuana just get legalized or something? Lots of people suddenly decided they need some MO in their portfolio.
@123098567432 maybe the buyback hit.
Matthew Zeets profile picture
That was a little surprising to me as well. Perhaps buybacks as @mrNCSU suggests, may have just been continued rotation to value, or some combination of the two.
SeriousUsername profile picture
yaaaay MO share prices are going up,now people interested in owning part of the company get less yield for their money,yaaay arent we all happy about that,whoo....
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