Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.
Short Option Plays Are Enhanced with These Huge Buybacks
Avnet, Inc. (AVT), the global electronics distribution company based in Phoenix, AZ, posted 4% better than expected earnings on Aug. 10 for its final fiscal quarter ending July 2. The stock is now very cheap at $44.20 as of Aug. 12. Analysts project $6.83 in earnings per share (EPS) for the year ending June 2023, putting it on a 6.4x multiple of EPS.
Moreover, Avnet now pays a $1.04 per share annual dividend, giving it a 2.35% dividend yield. Moreover, the company has consistently raised its dividend every year in the past 7 years.
Buybacks
But even more importantly Avnet is now producing a large amount of free cash flow and it's using that to buy back shares. For example, Avnet spent $102 million in share buybacks in the latest quarter, representing 2.40% of its $4.25 billion market capitalization.
By comparison, for the year ending July 2, Avnet bought back $184.4 million of its shares. That represents 4.34% of its market cap today. As a result, its buybacks are accelerating, given how much it spent this past quarter.
I have written in the past that this makes a stock more attractive to investors who want to create income by shorting out-of-the-money (OTM) puts and calls. For example, the lower share count helps push up the stock price and also allows the company to raise its dividend per share without any higher cost.
This is the case with Avnet, as both OTM puts and calls provide good income opportunities to investors.
Short Put Income Plays with AVT Stock
The table below shows the Barchart Sept. 16 put option chain and the opportunities to short out-of-the-money (OTM) puts.
For example, the $41.00 strike price puts can be shorted and the investor will receive $63 per contract, although he will have an obligation to purchase pay $4100 for 100 shares if the stock falls to $41.00 or lower by Sept. 16.
But that is a great return for a little over one month. For example, $63/$4,100 works out to a yield of 1.536%. If this is done every month the annual return works out to over 18.4%. Moreover, at this price, the $1.04 dividend provides a 2.54% annual yield, which is better than what the stock yields now.
In addition, covered call plays are also worth looking at. For example, the chart below shows that the $47.00 strike price has a decent covered call opportunity.
The $47.00 strike price offers a 43 cents premium. So an investor today buys the stock at $44.20 and immediately receives $43 cents by shorting the $47.00 call for expiration on Sept. 16. That represents a 0.97% income yield (i.e., $43/$4,420 cost).
In fact, investors could do both of these plays at once. It would cost $4,420 to buy the covered calls and tie up $4,100 in margin for the short play, for a total use of funds of $8,520. But the investor would receive $63.00 from the short put play and $43.00 from the covered call play, or $106.00.
That represents a 1.244% yield for just over one month's use of those funds. If that can be repeated every month, the annual return is 14.93%. Moreover, if the stock does not rise over $47.00 the investor gets to keep the dividends, and even if it does, the investor keeps the
That is a very good return on capital. Given that Avnet is buying back shares, this makes the stock much more stable and likely to rise higher or not fall as much as the market. That helps investors in these OTM short option income plays over the long run.
More Stock Market News from Barchart
