MED - Medifast: A High Yield But Low Portfolio Size Hold For Me

2023-04-03 08:21:49 ET

Summary

• The latest dividend yields over 6% on its market price.
• The latest dividend payout is less than 50% of its latest quarter earnings.
• The company is asset light and is free of interest bearing debts. This adds comfort at current interest rates scenario.

Medifast ( MED ) is a global company behind one of the fastest-growing health and wellness communities, OPTAVIA®. Medifast is a leading manufacturer and distributor of clinically-proven healthy living products and programs. The company produces, distributes and sells weight loss and weight management products directly online and through franchise distribution. The company boasts a diversified portfolio of consumable products, which include bars, bites, cereal crunch, drinks, oatmeal, pancakes, pretzels, puffs, hearty choices, pudding, soft serve, shakes, smoothies, soft bakes and soups.

The company sells different types of products, which are formed on the basis of its proprietary formulas. The products are sold under different brands including the Medifast, OPTAVIA, Thrive by Medifast etc. OPTAVIA product line is sold through its community of independent coaches who offer support and guidance to their clients. Medifast claims to have a consistent, scalable model.

What I like about this company can be quickly listed with bullet points.

• The dividend is juicy. They paid a dividend of $1.65 in the last quarter 2023 with ex-date 28-Mar-2023 and pay date 09-May-2023.
• They started paying dividends from the last quarter of 2015 and since then increased the dividend every year by a double digit percentage over the earlier year. The current year increase is a more modest one cent increase from previous year and deviated from the fat increases of the past. The past quarterly dividends history read $0.25 (Yr 2016), $0.32(Yr2017), $0.48(Yr2018), $0.75(Yr2019), $1.13(Yr2020), $1.42(Yr2021), $1.64(Yr2022) and $1.65 (Yr2023).
• The latest dividend payout is less than 50% of the latest quarter earnings.
• The latest dividend yields over 6% on its market price.
• The company is asset light. As per last quarter report, they had $87.7 million cash and company remains free of any interest bearing debts. Thus the raising interest scenario cannot pose any complications.
• The current PE is in single digit.
• Seeking Alpha's gradings are positive in my view. I have provided an image of their rankings.

The negative views can also be quickly listed in bullet points:

MED is not for every investor. The negative side of an investment in this company for passive income investors is given below while I also mention why I view them positively. These are my own views.

• The business model can be viewed similar to a ponzi scheme. The learners often become coaches and the more the coaches, the more the business revenue and growth for MED. One can wonder how long this can go. I view this more positively from the past 6 years of consistent growth. But my views can be wrong and you could view it other way.
• The company's market cap is approximately $1.2 billion and is in the consumer staples sector and belongs to 'personal products' industry. In times of extreme financial stress as in a recession, the spending power of consumers can drive the company to lose business. The positive side is that 'health and fitness' is considered very important and can be very important 'not to ignore' expense even during moderate economic swings time.
• MED has a market short interest of around 6% and the relatively small market cap size can be used by bears and bulls alike to move the market prices easily.
• The recent quarterly results despite an earnings beat and a revenue beat, ended the market day with traders selling the shares heavily. However, the prices recovered more than 25% within a few months. Any fresh information as to moderation in growth going forward can again be used by market bears to take down the prices. All investors cannot stomach such heavy fluctuations in market prices. This is a high beta share.

The following table is from my personal historical dividend database related to MED:

One can see the highest yield from MED was in year 2020 when Covid crash took MED market prices to yield as high as 9.22%. Can such a crash again happen? I do not have a crystal ball to predict. Probably this time around, the low prices can be as low as $95 or near about. Hence I am not going to wait for such crash prices. I rate this a good buy around $95 or below and a very fair price when it yields 6%+ as of now given its dynamics.

I plan to accumulate shares of MED to a max of 1% of my portfolio size in a slow manner. Those who have read my earlier articles know that I trade as well as hold shares for long term. I always go long and never short. I follow the day charts and work accordingly. If I add, say one lot at $103 then I patiently wait for the prices to bounce back a little, say 2% as a minimum. Then I exit 90 or 95 of those share bought depending on that swings gain say at $105 or $106 or even higher. Depending on the price exited, the short term gains made are considered as my reserve gains or moat I create against any unexpected price drops over time. In this case, say $ 2 per share on 95 shares exited (example), will generate $190 and the 5 shares retained will get a price advantage of $38 on my cost.

Thus the cash flow cost for me will be $103 less $38 or $65. I will do similar trades over time and slowly build the position to reach 1% of my portfolio over time. The cash flow cost should make my future dividend income on these long held shares over 10% of my net investments. Any missteps will make me hold these shares at a minimum of 6%+ yield with which I am happy as well. Following me or this method, one should not over accumulate any large portion in any one single company. Hence trade or invest at your risk. I just shared my views here. I am not a qualified investment advisor. During the last few weeks, I started trading MED and I already have a small position with net cash flow cost of $50. I will continue this till the price range remains with a dividend yield greater than 6% yield.

The April expiry 95 strike PUT or 90 strike PUT are very attractive for a cash secured PUT. Even if they expire, the return could work out to well over 20% pa return rate. But I do not recommend any over exposure and the total holdings inclusive of such option assignment should be well within a moderate portfolio percentage.

Wish you happy investing.

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