Wednesday, April 27, 2016

PAYX versus ADP

A "Seeking Alpha" follower asked about a comparison of PAYX and ADP.  Two stocks in a similar business.  ADP is a lot bigger than PAYX.

I present to you the comparative analysis using my 2016 criteria in the tables below.  You decide.

M* TheMoneyMadam

Disclosure: Long PAYX
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Tuesday, April 26, 2016

Adding Paychex to 2016 Dividend Portfolio

In 2016 I am looking for a solid stock, one that could withstand a major market disruption.  More than just safety, I need yield and yield growth.  To boost yield I need a stock highly likely to provide covered call income.  Simple stuff right?

This post presents the Dividend stock fundamentals of my most recent 2016 portfolio addition.  I already own this stock and I am up about 10% since July 2015 not including dividends.  With dividends added in I am up 12.3%.  I have not sold any calls on PAYX.

I added PAYX to the 2015 Dividend Machine Model Portfolio in July 2015.   That portfolio is long only.  Whereas in 2016 I will record actual sales as a result of calls being assigned but otherwise, the 2016 portfolio is also long only.

Paychex 2016 Fundamentals

In the table below you will see the data I used to evaluate Paychex.  Earnings are greater than dividends paid $2.04 EPS and $1.68 annual dividend payout.  Dividend yield is 3.2% which is very nice for income investors and dividend growth over the past five years has averaged more than 6% per year.  Even more good news for income investors.   Debt to equity ratio (D/E) is 0.  Paychex has virtually no debt.  So far we have a good dividend stock that would seem to be a safe bet.

Notice a couple of things from that table.  First look at revenue growth.   I am looking for, and believe me it is hard to find, a stock with revenue growth at least 4% year over year (y/y) for the past 3 years.   PAYX has double their revenue growth 8.70%.  Next look at the failure of PAYX to solicit covered calls.  Technically this is a failure but like, WSO, I will wait for some volatility to occur and a covered call to come our way.

Open interest and put/call ratios are a couple of ways to determine if you think a stock will have a future with covered calls available.  Here is a link to a site that writes about call/put activity.  This article written in October 2015 points toward the call opportunities of PAYX.  I am hoping this opportunity will come up again soon.  I see a September $55 call for $.90 but the call expiration date is too far out and the strike price is too low.

In the interim, we have a stock paying not just income, but income that is highly likely to continue to grow while we are paid for yield boosting covered calls and future capital gains.

While I do not technically use other factors to make my decisions to add stocks to my model portfolios, I do like the business.   As all employers know, managing your payroll and making sure you do not run afoul of a myriad of regulatory requirements is a daunting task.  The need for a professional service to manage this part of running a business will grow.  Moreover, Paychex is not a one trick pony.  They also offer retirement and insurance services.

Consider Paychex, PAYX, for the income producing portion of your stock portfolio.

M* TheMoneyMadam

Disclosure:  Long PAYX
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Thursday, April 21, 2016

Market timing with covered calls

Microchip Technology on trade fair Embedded Wo...
Microchip Technology on trade fair Embedded World a few minutes before opening the fair, Nuremberg, Germany 2008 (Photo credit: Wikipedia)

One of the many ways to use covered calls to manage your stocks is to use them to get rid of a stock.  


You should have a good reason to get rid of a stock because when you use covered calls with the idea of being assigned (the call buyer exercises the option and buys your shares) it happens a lot.  You do not want to use this strategy on stocks you will be sorry to lose.

This technique is really a timing mechanism.  I think the stock market seems a little expensive based on P/E ratio.  Times are uncertain locally and globally.  I lighten up on stocks that no longer meet my dividend stock selection criteria with emphasis on stocks that are over valued by P/E (price earnings) ratio.   Microchip Technology, MCHP is the stock I am writing about today.

Dividend Machine Fundamentals to decide which stock to sell.

I started using only four criteria to pick a Dividend stock and in 2016 I added two criteria.   My first four metrics were (1) EPS greater than dividends paid out (2) dividend yield of 3% (upped to 3.5% in 2014), dividend growth rate year over year (minimal 5 year growth rate upped to 4% in 2014), and D/E or debt to equity ratio of 1 or less or equal to industry standards.

In 2016 I lowered the dividend yield minimum to 2.75% but added two criteria (1) revenue growth over the past 3 years of at least 4% and (2) availability of covered call options that would yield at least 1% on each contract and a minimum of 8% capital gain over basis should the call be assigned.  In other words, the strike price has to be 8% greater than my basis.

Microchip Technology Dividend Stock Fundamentals

Microchip Technology (MCHP), my very first Dividend Machine, is still in my personal portfolio and I have been working the calls and receiving the dividend.  Now I am working the calls to get rid of Microchip.

Microchip violates two of my key criteria: it has a D/E ratio of 1.38 which is too high and the dividend growth rate is to low.   Moreover, I think the market may be overvalued and I think MCHP is ripe for selling because the P/E ratio is 30.38.   

MCHP's stock price appreciation has been quite good since I initiated a position in November of 2010.  My first buy was at $33.55.  MCHP trades to day about $49.50 for quite a nice gain.  My personal basis is $34.93.   The dividend yield is 2.95% which isn't bad but the dividend growth has been a tepid .869% per year which is another reason to dump it.

In an effort to grow, MCHP, bought another company, Atmel and is working through the process of making money from that acquisition.  I don't use that kind of news to make my decisions about dividend stocks.  I just don't know enough about it.  I stick to my fundamentals.

However, for those knowledgeable about the acquisition, you may be willing to wait for the acquisition to pay off.  Analysts think that indeed MCHP will grow and project a forward P/E around 18.  Due to the debt and slow dividend growth, I am still wanting to get rid of MCHP

Getting rid of MCHP with Covered Call Options

Now take a look at the list of calls that I have used to boost my income and more recently to try to get rid of MCHP.

As time progressed and I realized that that their debt was increasing and the dividend was not, I wanted to get rid of it so I sold calls very close to the current trading price.  So far, I have had no takers on my last 200 shares but I will continue to try.  You will see that I just sold May 20, 2016 calls for $.95 a contract.  Notice that the range of call premiums was $.55 to $3.80.

Actual MCHP Covered Call Experience

Covered call premiums on the 300 hundred shares in my Dividend Machine Portfolios have been good and all three hundred shares would have been assigned.  I bought at the same time I wrote about MCHP.  I personally bought 500 shares.  300 of my shares were assigned as they would have been in the model portfolios and I am left with 200 shares.

My basis on my remaining 200 shares is  $6,986 or $34.93 per share.  My basis on all 500 shares is $17,465.   My income from MCHP covered calls so far is $2,365.  Covered calls added  13.54% to my income.   That does not include dividends.

Strategy Keys

The key to this strategy is to select a strike price very close to the selling price and with an expiration date no greater than 30 days out.  You don't want to wait around while the stock price deteriorates to meet the deteriorating dividend fundamentals.   I sold my most recent call on April 19 with an expiration date of May 20. 

You want a really good premium.   If the call expiration date is before the next ex-dividend date, you want the premium to be even richer.   I like a minimum of 1 % plus the amount the quarter dividend that I may lose out on.  The most recent call premium was $.95 or 2.7% on my basis and 1.9% on today's price.

This is an example of how to use covered calls to time the market and get out of a stock that for one or more reasons seems over valued or under performing as a dividend machine.

M* TheMoneyMadam 
Disclosure:  Long MCHP with calls

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