I
am trying to sell ABBV. I describe why
and how and discuss the risks of my strategy in this post.
When
the market swoons, I tend to ignore it unless I have a ton of cash around that
needs investing. I always have two
years of routine expenses in cash, but I don’t have a “ton” of cash around
right now. Therefore, I am not a very
active investor as the market dips.
I suggested to Alfred Ferol that the market, in its infinite over reactions,
could drop to 10,000 and he asked me when I am going to sell.
If I didn’t sell in 2008/2009, I certainly
am not going to sell now. This is the sixth
time I have been through times like this: 1987, 1992, 1994, 2001, 2009, and now in 2015. Income investors should never be in a
situation where you have to sell something to pay your bills. You need to structure your portfolio to
provide enough income to supplement social security, pension, rental income and
the like to meet your monthly expenses. However, you can work your portfolio to create more income.
ABBV’s
dividend better than parent ABT’s dividend.
While
I am not a vigorous investor this week, I look for weaknesses in my portfolio
to see if I should take action. AbbVie,
symbol ABBV, was a spin off from Abbott Labs, symbol ABT. I sold ABT through covered calls quite a
while ago because as a result of the split, ABBV retained the big cash flow and
was paying about 4% whereas ABT was paying barely over 1%. It made sense for an income investor to keep
the higher cash flow.
ABBV’s
D/E ratio is too high.
Today
I looked at ABBV with the eye of a risk taker.
I measure risk by D/E ratio. Any
stock with a D/E ratio above 1 or above industry standard makes me nervous. ABBV has been worth the risk because of the
ample dividend and because it is volatile enough to command extra covered call
income. Plus even income investors appreciate a capital gain.
My
gain in ABBV is about 119% even with the recent price decline from a high of $71.80. ABBV’s yield is down to 3.55%. The trigger is their D/E ratio which is
4.93. This is way too high for me. So I want to sell ABBV. I am a little greedy have decided to sell a
November covered call with a strike price very close to the trading price. Strike prices that are close to the trading price, provide juicy income. Plus, I
should receive their October dividend, and the call premium. Now I have to hope the call buyer will call
away my stock.
ABBV
Covered Call with Strike Price close to trading price.
The
risk is I could be stuck with ABBV if the call buyer does not take my stock. The risk is not huge as they continue to pay
the dividend but the D/E ratio still makes me nervous. If the stock is not called away, I will
probably sell it out right. However, the
price could be lower than it is now.
The covered call table above presents the income opportunity from
selling ABBV with a covered call strike price close to its trading price.
Work
that portfolio.
TheMoneyMadam
Disclosure: Long ABBV with calls
