How busy was Altria’s (MO) options trading on Wednesday? It had no less than 11 puts or calls exhibiting unusual options activity -- a Vol/OI ratio of 1.25x or higher -- with volumes of 10,000 or more on five of them.
Something is up. It’s been two years since Altria experienced volume like yesterday’s. I’m guessing big hitters picked up long-duration calls, given that the put/call ratio was 0.02.
But as I’ve said, I’m a neophyte regarding options. My skill lies in assessing a company’s strengths and weaknesses vis-a-vis its business model. Good business models -- think Costco (COST) -- never go out of style.
Yesterday’s volume doesn’t confirm that investors are building positions in Altria. However, with volume of just 18,099 at midday on Thursday, I wouldn’t discount it.
So, I’ll answer two questions for readers: First, is Altria a long-term buy? Secondly, which of the 11 unusually active options from Wednesday were worth buying to secure Altria stock in the future?
Yay, or Nay to Altria?
Everyone and their dog knows about Altria’s humongous dividend yield. With the October 2023 payment of $0.98, up four cents from July, it will have an annualized rate of $3.92, yielding 8.9%. It has increased its dividend for the 58th time over the past 54 years, putting it in an elite company. It is one of only 49 S&P 500 stocks that have increased their annual dividend payout for 50 or more consecutive years.
Also keen about share repurchases, Altria’s shareholder yield -- dividend yield plus buyback yield -- is 10.4%, putting it ahead of most companies in the index.
So, even with interest rates as high as they are, it’s an enticing yield. If you have no problem owning so-called sin stocks like Altria, you’d be silly not to consider MO, which pays you to wait for its share price to appreciate.
For example, although MO stock over the past five years is down more than 29%, its annualized total return is flat, thanks to its consistent dividends, at -0.05%. Over 15 years, it’s 9.3%. Anything over 8% is good in my books.
Earlier this year, Altria announced that it was getting back into the e-cigarette game, buying NJOY Holdings for $2.75 billion, plus $500 million in potential earnouts for achieving certain regulatory approvals. The acquisition is part of the company’s Moving Beyond Smoking business strategy.
“We are excited to add NJOY’s e-vapor intellectual property as a new platform that we believe we can build on to help more adult smokers transition to smoke-free alternatives,” Olivier Houpert, Altria’s Chief Innovation and Product Officer, said in the company’s March press release announcing the deal.
The company has four product segments in its smoke-free offerings: Smokeless Tobacco, often called chewing tobacco, Nicotine Pouches, E-Vapor (NJOY acquisition), and Heated Tobacco products through its majority-owned joint venture with JT Group, the owners of Japan Tobacco.
The e-vapor category generated $7 billion in U.S. retail sales in the past year. It is the largest smoke-free category in the U.S. Altria has an opportunity to capture a big chunk of that.
Altria’s goal for its smoke-free products is $5 billion by 2028. It finished 2022 with $2.6 billion. The acquisition of NJOY should help it meet its goal.
I don’t think there’s any question; Altria is a controversial stock, given its history in the cigarette business. However, the appreciation potential of its smoke-free products combined with the cash flow from its smokable products makes it an excellent contrarian play.
I say yay to MO stock.
The Best Option to Play MO
Over the past five years, MO stock has only traded below $40 on one occasion from March to November 2020. That would make a perfect entry point for buying Altria stock.
Of the 11 unusually active options from yesterday, none will get you all the way there. However, two stand out for me. One is a put -- the only put, by the way -- and the other a call.
The put has a $47.50 strike price with a June 21/2024 expiry, 281 days from now. As of yesterday’s close of $44.75, it was $2.75 in the money. With a $5.25 bid, your net price paid should you have to buy the shares would be $42.25, $1.69 below where it’s currently trading.
With 281 days to expiration, anything could happen. More than likely, it moves above the strike, and you’re left with the premium income yielding 15.2% on an annualized basis. That’s not a bad consolation prize.
As for the call, I like the Jan. 17/2025 $35 strike with a $9.85 ask. Sure, you’re paying 28% of the strike price to secure your right to buy 100 shares of MO stock in 492 days. But at a net price of $44.85, you could be sitting on a decent entry point should Altria shares catch fire over the next 70 weeks.
The volume yesterday on that call was 34,834 or 12.85x its open interest. Anything over 10x suggests there’s some unusual interest.
Both the put and call have long durations that provide sufficient time for the Altria Moving Beyond Smoking business strategy to gain traction with investors.
Good luck!
On the date of publication, Will Ashworth did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
