Nestle call options

[Guest JoelS]

Intrigued by David Winters' investment here, http://www.gurufocus.com/news/250785/david-winters-comments-on-nestle-sa

 

"With sentiment on Nestlé so poor, we saw a rare opportunity to initiate a position in long-dated call options on Nestlé shares at what we believe to be a very reasonable price. These options give the Fund the right, but not the obligation, to purchase Nestlé shares at any time before December 2017 at share prices of 60 and 68 Swiss Francs per share, not far from the 66.15 Swiss Francs per share where they finished trading in 2013. If Nestlé shares have even modest price appreciation by 2017, the Fund stands to reap a handsome return on the call options. Although these options carry more risk than simply owning the underlying shares, we believe the risk/reward equation is firmly in our favor in this case."

 

- has anyone on the board bought Nestle call options? If so, which did you buy? Are the options still attractive?

[claphands22]

The call options do seem cheap. I'm looking at Interactve and December 21 2018 call options at a 68 strike price go for 5.60.  Nestle is at 65.60 today.

 

Could be interesting, thanks.

 

 

[karthikpm]

I think Nestle is such a wonderful business  that I just own the equity and collect the dividend while waiting for the upside. Call options are predicated on the business reaching a certain price at a certain time. That may not happen as easily as Winter's expects . The emerging markets may not provide the upside immediately given currency issues and slowing EMs

 

 

As Buffett says " “Time is the friend of the wonderful business, the enemy of the mediocre.”. I am happy owning Nestle for a really long time

[Vish_ram]

The call options do seem cheap. I'm looking at Interactve and December 21 2018 call options at a 68 strike price go for 5.60.  Nestle is at 65.60 today.

 

Could be interesting, thanks.

 

The value of the call option gets reduced by the amount of the dividend. Nestle pays a high div.

[plato1976]

I have some difficulty to understand why ppl call Nestle stock as cheap now

 

I think Nestle is such a wonderful business  that I just own the equity and collect the dividend while waiting for the upside. Call options are predicated on the business reaching a certain price at a certain time. That may not happen as easily as Winter's expects . The emerging markets may not provide the upside immediately given currency issues and slowing EMs

 

 

As Buffett says " “Time is the friend of the wonderful business, the enemy of the mediocre.”. I am happy owning Nestle for a really long time

[moody202]

The call options do seem cheap. I'm looking at Interactve and December 21 2018 call options at a 68 strike price go for 5.60.  Nestle is at 65.60 today.

 

Could be interesting, thanks.

 

The value of the call option gets reduced by the amount of the dividend. Nestle pays a high div.

 

I don't understand how this works. Do you have articles you can refer me to?

[LC]

I believe he is referring to the fact that the stock price should be reduced upon paying a dividend, and because the value of the call option is derived from the stock price, the dividend payment reduces the value of the call.

 

However isn't this usually "priced in" to the premium of the call?

[Vish_ram]

The call options do seem cheap. I'm looking at Interactve and December 21 2018 call options at a 68 strike price go for 5.60.  Nestle is at 65.60 today.

 

Could be interesting, thanks.

 

The value of the call option gets reduced by the amount of the dividend. Nestle pays a high div.

 

I don't understand how this works. Do you have articles you can refer me to?

 

http://www.putcallparity.net/put-call-parity-of-european-options-with-dividends

 

 

call = stock + put - dividend - X (capital needed to exercise the option, adj for rates)

[Ross812]

Nestle is a great company I've never bought any though because I thought the withholding tax was 35% and you cannot claim the tax within an IRA. I just looked back and a SA article I read said the tax rate was 15 or 35%. Which is it for US investors?

[plato1976]

I think ADR dividend can be qualified dividend - so it's more like 15%

If they withhold your div tax I think you can claim it back if it's in a taxable account

Not sure how though

 

Nestle is a great company I've never bought any though because I thought the withholding tax was 35% and you cannot claim the tax within an IRA. I just looked back and a SA article I read said the tax rate was 15 or 35%. Which is it for US investors?

[siddharth18]

Is there a write-up available somewhere about Nestle? There is one on VIC but it's 5 years old.

[plato1976]

I searched around and didn't find one

appreciate if anyone can post one

I don't feel this is really cheap - it's actually at the higher side of valuation against its peers but maybe it's worth the premium

 

Is there a write-up available somewhere about Nestle? There is one on VIC but it's 5 years old.

[dpetrescu]

That cannot be right, it would mean an implied volatility (aka call price) of 15%. I would be interested in seeing a write up to see if it's worth investigating in detail.

 

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The call options do seem cheap. I'm looking at Interactve and December 21 2018 call options at a 68 strike price go for 5.60.  Nestle is at 65.60 today.

 

Could be interesting, thanks.

 

[Gregmal]

Bump. I think I’m the current environment, obviously adjusting for many years and now using a different date/strike, this is a wicked good trade to put on.

[Dinar]

13 minutes ago, Gregmal said:

Bump. I think I’m the current environment, obviously adjusting for many years and now using a different date/strike, this is a wicked good trade to put on.

Greg, why do you like it?  Do you think that the underlying is cheap or that the options are very cheap relative to the underlying?  I have Nestle at 20x 2023 EPS, am I missing something?

[Gregmal]

Nestle is an under appreciated consumer staples power house. The options are still cheap, yes. But I think they can grow earnings above inflation without trying too hard. So if you sit down and write up a list of all the shot folks are scared of right now, namely inflation and recession, Nestle becomes more potent and appreciated in those situations.
 

Also, because of its size, there is international arbitrage opportunities for the company as far as labor and product sourcing goes. American sugar is a good example historically. 

[thowed]

I think an extra argument for Nestle right now is receiving dividends/gains in Swiss Francs, which should be a very attractive currency in an inflationary environment (well historically, in any environment).  Nestle have a long history of managing the currency, so can still make money even when all other currencies are against them, and then you receive the benefit.

 

The guy in charge seems alright e.g. aware of the bigger trends towards 'wellness' (versus the old-school e.g. Kraft).  And as per Russo, they have a decent 'capacity to suffer' when planning beneficial long-term opportunities.

[Dinar]

Thank you Greg and thowed.  I own L'Oreal, Campari, Heineken, Swedish Match and PM for the same reasons as you mentioned.  I used to own Nestle years ago, time to revisit.  Thank you again.  

[Spekulatius]

Nestle - multiple is too high and high EM exposure are my concerns. EM exposure will cause weakness due to currency issue and high energy prices reducing growth. i don't think it's safe pick here. I owned this in the past for many many years, but multiples were way lower back then.

Edited June 1, 2022 by Spekulatius

[thowed]

Bump - did anyone do this?

 

Seemed to suffer last year, whether GLP-1 related or otherwise, alongside other Consumer Staples.  Wonder if the sector might turn in 2023?

 

Up 2.5% today but that's from a multi-year bottom.

[Dinar]

In my opinion, the biggest problem Nestle, and many other consumer staples is face is essentially zero volume growth.  With zero volume growth, hard to grow above inflation, and hence fair multiple is call it 16-20x free cash flow, so you want to buy say at 10?  Nestle is unlikely to ever trade at a p/e of 10, unless it is a market where every is down 40%.

[ValueArb]

On 3/13/2014 at 10:38 PM, dpetrescu said:

That cannot be right, it would mean an implied volatility (aka call price) of 15%. I would be interested in seeing a write up to see if it's worth investigating in detail.

 

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The call options do seem cheap. I'm looking at Interactve and December 21 2018 call options at a 68 strike price go for 5.60.  Nestle is at 65.60 today.

 

Could be interesting, thanks.

 

 

Nestle closed at $80.78 December 21, 2018. Anyone who paid $5.60 for $68 calls on March 13, 2014, turned it into $12.78, which my math says is an 18.8% annualized return. According to Yahoo there were quite a few opportunities to close out at above $85 in the year that would have generated annualized returns of over 30%.

 

Yahoo claims Nestle closed at $73.85 on March 13, 2014, and lists an adjusted price of $57.24 which I assume is net of dividends. Neither matches the $65.60? Using the $65.60 number since its the only one we can trust and adding back $11.84 in dividends in those 4 years gives the stock buyer an 7.5% annualized return, which doesn't account for taxes, or time value of getting the dividends before end of period, and clearly I can't trust Yahoo's December 2018 prices. But obviously the stock return was a lot lower risk, the options could have been a zero had Nestle not grown, or run into a significant business issue or maybe even if it had increased its payout ratios, etc.

 

LEAPs have been very interesting to me ever since I read the Cornwall Capital chapters in the Big Short, but I've never been able make them work for me. I've almost always found their cost to be too high, they decay too quickly and when they seem cheap my track record is mixed (we'll see how my Jan 18 $20 SAVE calls work out).

 

My knee jerk reaction is always there is no free lunch, clearly Nestle's call options are cheaper because of its high dividend payout ratio reduces long term NAV and earnings growth. But the market should already know this and maybe the extra uncertainty on how much effect future dividends will have means Nestle's calls are still cheaper than they should be. IE maybe the calls are being over-discounted for the uncertain amount of future dividends?

[valueseek]

on the point about LEAPS, @ERICOPOLY on this forum has had some tremendous success in deploying the warrant and LEAPS strategy in the previous decade esp. on bank stocks. I went back and studied several of his posts. My very crude basic in LEAP's is buying mostly for stocks that are just incredibly cheap by most parameters and there is just a lot of fear/etc. around those names, buying the longer dated - 2 year out if they are 10-20% or lower on the strike price (new are generally available in Sep.), choosing the strike price generally around the trading price, and rolling over 1yr-6 months before expiration. Have only used this sparingly thus far - JPM back in 2015-2018 time frame, and $C just this Oct. Have worked out pretty well thus far. But sizing has been particularly poor.

[ValueArb]

1 hour ago, valueseek said:

on the point about LEAPS, @ERICOPOLY on this forum has had some tremendous success in deploying the warrant and LEAPS strategy in the previous decade esp. on bank stocks. I went back and studied several of his posts. My very crude basic in LEAP's is buying mostly for stocks that are just incredibly cheap by most parameters and there is just a lot of fear/etc. around those names, buying the longer dated - 2 year out if they are 10-20% or lower on the strike price (new are generally available in Sep.), choosing the strike price generally around the trading price, and rolling over 1yr-6 months before expiration. Have only used this sparingly thus far - JPM back in 2015-2018 time frame, and $C just this Oct. Have worked out pretty well thus far. But sizing has been particularly poor.

 

Thanks, I'll start stalking you and eric's posts;)

[lnofeisone]

19 hours ago, ValueArb said:

 

Thanks, I'll start stalking you and eric's posts;)

One of my favorite trades is buy warrants/sell leaps. This trade works particularly well when the stock price exceeds the warrant strike price and the call price starts to be more expensive than leaps for the same duration.