Tuesday, October 23, 2018

Caterpillar is not going out of business. Adding with a call

Caterpillar (CAT) is part of my portfolio.   CAT can be compelling not because of the size of its products, but the size of the call premiums.   If you have ice in your veins, you might consider a trade like this one.

Note, I did not include the January dividend because the call expires on the day CAT is expected to go ex-dividend.  If we get the dividend that would be nice but this call gives a juicy enough return to go for it without capturing the next dividend.




M* MoneyMadam
Disclosure:  Long CAT with calls

Monday, October 22, 2018

A little risk off - bought a Four Year Bond

Some would not call this a "risk off" trade because the bond I bought is rated B-.  I have dabbled in Cinemark bonds before and you will see the 2023 Cinemark bond already in the bond portfolio is doing well.

Look at the underlying stock Cinemark.  Applying my Dividend Machine criteria makes Cinemark, symbol CNK, look good.  The dividend is around 3% but the bonds are paying closer to 5%. 

I bought the December 15, 2022 5.125% coupon for $96.10 ytm (yield to maturity) 5.437%. The cusip for this bond is:  172441AX5.





This bond is just another feather in the quiver not where I will put all my investments. 

M* MoneyMadam
















Thursday, October 11, 2018

New Dividend Machine Eaton ETN

Let's review my criteria for picking a dividend machine and then I will explain why I am adding to Eaton, symbol ETN.

  • Dividend exceeds 10 year U.S. Treasury
  • EPS (earnings per share) greater than Dividend
  • Dividend Growth equal to or exceeding inflation
  • Recent Revenue Growth
  • D/E (debt to equity ratio) less then 1 or equal to industry standard

Dividend Exceeds 10 year U.S. Treasury


This is a hurdle that is hardest to meet as interest rates are going up.   Why not just buy a 10 year Treasury and go play golf.   In 10 years your principal will be returned by the Government but due to inflation the spending power of the returned principal will be diminished.   Using this logic, I can buy a stock with a yield close to the 10 year Treasury if I feel both my principal and income will grow over that 10 years.  (See 1 year graph of 10 year Treasury courtesy of Market Watch.)




EPS must exceed dividend.   


This metric seems so simple but companies with externalities outside their control may need to take a charge off against earnings during a given quarter.   This is not the case with ETN.   With ETN we have a straight forward EPS measure.  

For ETN, earnings at $7.06 far exceed the dividend pay out which is $2.64.   This ratio is often times referred to as payout ratio.  A high payout ratio is a doubled edged sword.   On one hand you would like a company to pay the stock holders as much as possible.  On the other hand, a stock that has a big cushion between EPS and dividend pay out is less likely to cut or suspend the dividend.  For conservative investors, this is critical.

Dividend Growth

All the time I helped other people manage their money I emphasized that in 20 years, your non discretionary expenses will double. I have been through this 2 times and I can verify that for this average girl, the projection is accurate and must be included in your financial plan.

You can ladder bonds as yield go up or you can put some of your income investments in stocks with solid dividend growth.   This post is not to discuss the vagaries of high current dividend versus low dividend yield but high dividend growth.   You must have dividend growth to meet your long term income goals.

Current Annual Inflation Chart

Eaton meets that goal with a 10% dividend increase recently and an average of over 11% increase annually over the past five years.

 

Recent Revenue Growth


In a previous post I wrote this week, I looked at 5 stocks with a combined average yield above 5%.  I looked at around 20 stocks but finding stocks with positive revenue growth was very difficult.  ETN describes it's business as "Eaton has approximately 96,000 employees in 59 countries and sells products to customers in more than 175 countries."  

Eaton suffers from exchange and tariff issues but prevails as an energy generator despite these challenges.  Revenues in 2015 were $20,855 (m) and in 2017 $20,040 (m).  That is flat to down a bit.  However, looking at their two most recent quarters and you see distinct revenue growth over the same two quarters one year ago.

2017 Quarter 1 = $4,848   2018 Quarter 1 = $5,251
2017 Quarter 2 = $5,132  2018 Quarter 2 = $5,487

D/E Ratio


Debt to equity ratio is very important to me.  A pristine balance sheet makes life much easier when we face the head winds of increasing interest rates.  For a power generator, ETN has always carried a very respectable amount of debt.  Eaton's debt to equity ratio is .40 (source MSN Money.)

Dividend Machine Fundamentals:


The table below presents ETN's Dividend Machine bona fides.


I believe Eaton deserves to be a Dividend Machine.  I will add it to my 2018 Model Portfolio that I post in this blog and I will be adding to my current position. 


M* MoneyMadam

Disclosure:  Long ETN






Home Depot debt makes me sell calls

Those who read my blog know I am always worried about balance sheet strength.  I don't care why a company has more debt than usual, then their peers, it makes me nervous.  Moreover, in this rising rate environment, I get even more nervous.

I hear that Home Depot (HD) took on debt to finance stock repurchase and that makes it o.k.  I go to their stores and see the crowds shoving their credit cards into the self check out and I am amazed.  Since there is little entry level housing available, it makes sense people are fixing up their abodes.

So here is my typical strategy. Milk HD for income.  I like their dividend and other's enthusiasm, so I am selling December $210 calls.  Even if I bought today it would be a good trade for call and dividend income because I picked an expiration date that would capture the dividend if, like most calls, this option expires without action. 

My basis over time is around $148.   I am willing to take a risk and lose HD if I don't lose it, I will either sell it or sell more calls.  It all depends on how their fundamentals look after the December expiration.  

The table below presents the details of this call.





Work your portfolio no matter what the broader market does.   Opportunity is there for your taking.

M* MoneyMadam
Disclosure:  Long HD with calls

Wednesday, October 10, 2018

Invest $200 K in a down market - for income M*

I don't know where the market is going any better than you or the experts on CNBC.  However, I know how to use fundamentals to build a portfolio.   I am busy working my holdings but here is a good start for a $200,000 portfolio using closing prices on 10/10/2018.  Be ready when opportunities come up.




Let's look at their P/E's (price to equity ratio) and D/E's (debt to equity ratio.)



Remember my focus, my specialty is income.  I don't have a pension.  My family lives off of the money our savings create.   Think about it.  You have to be ready when opportunities come up.

M*  MoneyMadam

Disclosure:  Long all positions

Thursday, October 4, 2018

Savers need this!

Put a little money in a one year C.D. (certificate of deposit.)  Chose Morgan Stanley 2.5% with an expiration of 10/11/2019 which is one year and seven days.  CUSIP is 61747M6Y2.    If rates go up again next month, I will ladder the next C.D.  

By the way, I could have picked a CD with a 2.65% yield that also is FDIC insured but, I just preferred the issurer is really safe.

M* MoneyMadam