I Can't Believe I Missed on Altria Stock

During the October meltdown, I passed around some advice on getting oneself to a more defensive portfolio allocation. I threw around names such as Verizon (VZ) , Seagate Technology (STX) , KeyCorp (KEY) , and Pfizer (PFE) as hideouts that had good track records on meeting dividend payments regardless of market conditions. I also threw my oil names at you... Royal Dutch (RDS.A) , British Petroleum (BP) , and ExxonMobil (XOM) . Al of these names did help ease what was has been a nasty bout of volatility.

I missed one, not just for you, but for my own book as well, that I really can't believe I missed. My bad, because this name had been one of my staples in the past. That name is Altria (MO) . The name reacted well to Q3 earnings that were released on October 25th. Cigarette volume dropped off a bit, but there was a surge in smokeless tobacco usage. Have an ethical problem with investing in tobacco? That is understandable. Then, this is not for you.

Altria pays out a quarterly dividend of $0.80, good enough at these prices for a yield of slightly more than 5%. The track record? This dividend runs with a five year growth rate of more than 8%, and a ten year rate of more than 11%. On top of that, the stock has performed, but is that move done? This name does trade at less than ten times forward looking earnings, but obviously can not be valued as a normal equity.


We see here loose adherence to both Fibonacci and Pitchfork models, but not a true obedience. The stock did experience the benefit of a technical reaction to a "golden cross" in mid-October ahead of earnings. I would love to grab some of this stock for my dividend book, but you know that I hate to chase. In fact, I just do not do it. I would love to somehow take a three or four dollar discount. If only there were a way.

The Trades (minimal lots)

You could just buy the equity at or close to the last sale of $63.67. A long-term investor would receive dividend payments totaling $3.20 per year at the current rate. If left alone, this would drive that investor's net basis considerably lower over time. I have another, faster idea. The firm reports again in January.

-Purchase 100 shares on Altria (MO) at or close to the last sale of $63.67.

-Sale of one MO January $70 Call (last: $0.43)

-Sale of one MO January $57.50 Put (last: $0.83)

-Sale of one MO January $55 Put (last: $0.53)

Outcomes:

1) Equity stays between 55 and 70: Trader owns 100 shares at a net basis of $61.88. With one dividend payment likely in December, that basis would drop further to $61.08.

2) Equity runs above $70 by January: Trader is flat the stock with a forced sale at $70, resulting in a net profit of $8.92 or 14.6%.

3) Equity sags below $55 by January: Trader would then be long 300 shares at a net basis of $57.86 (including the dividend payment on 100 shares.) This trader would at that time, sell three covered calls to further reduce that basis.

(BP is a holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells BP ? Learn more now.)

(A longer version of this column appeared at 8:23 a.m. ET on Real Money, our premium site for active traders. Click here to get great columns like this from Stephen "Sarge" Guilfoyle, Jim Cramer and other experts throughout the market day.)

At the time of publication, Stephen Guilfoyle was Long VZ, STX, KEY, PFE, RDS.A, BP, XOM equity.

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