In early trading on April 12 there was unusual activity with Medtronic (MDT) puts options, as seen in the Barchart Unusual Stock Options Activity Report. This indicates that a large investor had likely shorted near-term out-of-the-money (OTM) puts in an income-producing play. This implies a very clear bullish outlook for MDT stock, as the puts expire in a little over 2 months.
The Barchart Report shows that over 10,000 put options were traded at the $72.50 strike price expiring on June 16. That means the expiration period is just 65 days to expiration. The put options traded at 83 cents at the midpoint, which means that the trade was likely initiated by an investor who has likely shorted the puts.
This is because the premium received a 1.1% put-to-strike-price put. This can be seen by dividing 83 cents by the $72.50 strike price. As a result, if this trade can be replicated 6 times over the next 12 months, the annualized yield is 13.74%.
This also means that the investor expects that MDT won't fall to $72.50 or below within the next two months. That shows that they have a bullish outlook on MDT stock.
One reason why the expiration date might have been chosen is that Medtronic's fiscal year ends on April 30. That means that its results will likely be released before the expiration of the put options on June 16.
Moreover, there are a number of reasons why the stock looks cheap here.
MDT Stock Looks Cheap Here
Medtronic is a major medical device and therapies company that originally invented the pacemaker. The short-put investor likely has a bullish outlook as MDT stock looks cheap here. For example, it has a low 15x multiple, a healthy 3.3% dividend yield, and an ongoing stock buyback program.
Moreover, it's very possible that Medtronic will announce a dividend hike, as it has paid out four quarters of 68 cents. For example, every year in the past 9 years Medtronic has increased its dividend. With its upcoming earnings for the fiscal year ending April 30, Medtronic will likely extend this streak of dividend hikes to 10 years.
Another reason a dividend hike is possible is that Medtronic's dividend payout ratio is very low. For example, the existing $2.72 annual dividend rate is just 51% or so of analysts' $5.28 earnings per share forecast for the year ending April 2023. That means there is plenty of room to hike the dividend. It is not uncommon for companies to pay out well over 50% of earnings as dividends.
In addition, Medtronic has been buying back its common stock shares. So far this year it has bought back $548 million of its shares. That works out to about 0.70% of its $108 billion market cap.
In other words, MDT stock is not likely to fall when a cheap stock like MFT stock announces an upcoming dividend hike. This probably underlines the confidence that this large investor has in shorting out-of-the-money Medtronic put options.
On the date of publication, Mark R. Hake, CFA 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.
