Home Articles Options Writer Series — S&P Aristocrat On Sale (HRL)

Options Writer Series — S&P Aristocrat On Sale (HRL)


hormelBy Warren Kaplan

The Stock Option Writer

© Warren Kaplan 2011-2014

December 6, 2016

I love the stock market. Just when you think there are no more bargains, fate drops a gem into your lap. Hormel Foods Corp (HRL) is just that. I have been writing puts with a $35 strike price and calls with a $40 call price.  Here is a quick background on Hormel but you must do your own research.

The company has increased its dividend every year for 51 years in a row!! You have to assume that the Board does not want to stop that record. The stock is a top S&P Aristocrat holding.

Fact: That being so, at the Board meeting in November 2016, the dividend was raised to $.17 quarterly, up 17% from the previous quarter. Based on the closing price of $33.29 – December 1, 2016.  That brings the annual yield to 2.04%.

Fact: Hormel Foods Achieved Record Fourth Quarter and Full Year Results for the year ending Oct 31, 2016. The stock price is now below 20.87 X earnings.

Fact: The stock price today set new 12-; month lows. The52-week range is now $33.22-$45.72. It closed at $33.29 tonight.

Fact: I honed in on the $35.00 put strike price and the December 16, 2016 put option can be sold for $1.90; the January 20, 2017 put brings $2.35 and the March 17, 2017 put brings $2.90. I wrote put options at $35.00 to expire on those dates.  I believe the June 16, 2017 put option will bring up $3.50 for a potential 22.0% annual return That is a lot better than a 2.04% annual dividend return.  For IRAs and Roth accounts, you should consider the January 10, 2018 $35.00 put for a premium of $4.70 bringing you a 15.50% annual return. The beauty of the one-year contract is that you can concentrate on your job and not worry about making your money work harder. Additionally, in one year, I am quite sure that Hormel will again raise its annual dividend and therefore the dividend yield would exceed 2.24%. If you do get assigned, you can always sell a call against the shares.

Fact: The brokerage firm, BMO Capital, recently raised their price goal from $34.00 to $45.00 after seeing the October 31, 2016 results. On average, the analysts are projecting a price of $41.33 for Hormel.

Fact: Some of the brand names that the company makes are Jennie-O turkey, SPAM, Skippy Peanut Butter, Muscle Milk, Dinty Moore, Compleats, Wholly Guacamole and Black Label Bacon.

I consider this stock at the current price to be an excellent long-term hold with a 5-year price objective of $70 and a continually rise annual dividend.  So who is selling the stock and why? I have no idea nor do I care. Yes, the stock could lay down here for a while and it could even go lower. I consider that to be a better opportunity for me to accumulate more shares by selling put options.  Even now, you can sell the January 19, 2018 put options at $30.00 and take in at least $2.10 giving you a potential cost of $27.90. If you don’t get put, you earned a rate of return of 7.53%, which is a lot better than the annual dividend rate of 2.04%.

Another way to handle this is to buy the stock now at $33.29 and simultaneously sell the January 19, 2018 call at $40.00 and take in $1.40. The effect would be to reduce your cost from $33.29 - $1.40 = $31.89. The annual dividend yield to you would then be 2.31% plus you may end up selling the shares at $40.00 for a one-year capital gain of 25.43%.

As I revealed to you last time, consider subscribing for a small fee to Ben Reynolds analysis of the S&P Aristocrats. He can be reached ben@suredividend.com and just let him know that I recommended him. I have no affiliation with him.  He just follows a group of stocks that I love.

Judy and I will be away on Celebrity’s Reflection December 3-10 so there will be no article next week.  You are, as always, on your own.  In my next article, I will reveal a non-optionable area of investment that I have started to accumulate.



Charts are courtesy of Etrade.

warrenkaplan-2Warren Kaplan has been writing options for 50 years. He has been a stockbroker, investment banker and brokerage owner.  He currently owns and operates Kaplan Asset Management, a provider of financial assistance for small to middle market businesses. He has more than a half-century of experience in dealing with financial markets, giving guidance and consulting with management, and assisting in the development of business strategies and solutions. The Company has assisted and consulted many successful companies, such as Natures Bounty (NBTY) and Action Products International (APII), helping them to go public and trade on the NASDAQ stock exchange. His philosophy is to “do something with the profits.” “If you make $100 in the stock market, take 50 percent and invest it back into the market. Then, take the other 50 percent and buy yourself something.”

Additional disclosure: I am not a registered investment adviser and I do not give investment advice. Nothing in this article should be construed as investment advice. Investors are encouraged to do their own research and seek the advice of an investment professional before investing. Writing options is not for everyone.  This article was written for informational purposes only.