Monday, October 31, 2016

LLY What is going on with Eli Lilly - capitalize with call options

Drug stocks are down.  A few call options are looking interesting.  What is going on with Lilly?

Simply look at these three calls and you can see the call buyers are interested in Lilly.  Compared with Bristol (BMY) or Merck (MRK) the LLY calls are much better.

I can't buy LLY as a Dividend Machine because their revenues have not grown over the past 3 years and their dividend is solid but dividend growth is weak.  Debt to equity is okay at .59 and EPS are greater than dividends paid out.  Also, this is a solid company that basically built Indianapolis.

Three LLY Covered Calls

Each one of these calls has an expiration of January 20, 2016. 

Each one of these calls exceeds my criteria for covered call writing (also known as covered call selling.)  I expect at least a 10% return should my shares get called away.  I want the dividend and that means the expiration date needs to be after the next ex-dividend date which  in this case is November 10.  By the way, you need to own this stock before the ex-dividend date to get the dividend.  The call premium needs to be no less than 1% of my basis.

Strike Price $80

Strike Price $82.50

Strike Price $85.00

Total return, should the stock be called away, is best at the $85.00 strike price; over 17% in under 90 days.   Total return includes the gain in the shares from $73.84 to $85 plus the dividend of  $.51 plus the call premium of $1.50.

Income yield is best with the $80 call.   Basis is $73.84 and income is $.51 dividend and $2.70 call premium for income of $3.21 for a 90 day yield of 4.34%.

As an income investor I am going with the lower call and bigger income. I don't really want to own Lilly until it really gets it's growth act in order.   When I establish a position in LLY , I have to realize I could be stuck with this stock if the call buyer is wrong.

Remember that 90% of calls expire.   If I get stuck with LLY when the call expires and the price is lower than my basis, I at least get paid to wait through the dividend.  Plus, if the call buyers like the future, they may again buy my call and provide me with income.    I pocket the dividend and call premium and get stuck with a stock that will pay me more than I can get in any other safe investment. I am willing to take this risk.

M* MoneyMadam

Expect to buy LLY and sell $80 calls expiring in Jan, 2017

Walmart traffic plus dividend makes this a buy for 2016

Since I passed all my securities tests and became a licensed broker in 1991, I have used the most direct technique to measure the economy.  That simple technique is to walk around stores, and shopping centers to see what is going on.  I look at what I call the people count and the bag count. 

For instance in 1992 and again in 1994 when we went through difficult economic times, you could feel the negativity in every store and mall.   Today, I still use that technique and find the people count and the bag count quite vigorous but not in every store.

Times have changed over the past 25 years and e-commerce has captured a significant volume of economic activity as far as retail goes.  Yet, I still find my observations to be of value.

My recent observations suggest that Target, symbol TGT, is weak whereas Walmart, symbol WMT, and Costco, symbol COST, were mobbed.

Which stock is the best for me, a dedicated income investor?

Best Income

As you can see by the tables below.  The yield winner is Target (TGT) at 3.49%.  Costco (COST) has the weakest yield at 1.2% and Walmart (WMT) has an acceptable yield of 2.86%.  If I find a stock I really like and the yield is below my target which right now is about 2.75%, I look for covered calls to make up the difference.

The tables below present the best calls I could find.  While COST is close to delivering a 10% return if it were called away (the call buyer actually buys the stock at the strike price,) it is not compelling.  If COST tanks and we are stuck with it, a yield of just 1.2% barely makes it worth waiting.

Yield Growth

Every income investor knows that future dividend growth is a must.  We can only go by history to help decide which stock will deliver yield growth in the future.  Again, look at the tables above and you can see that all three stocks have delivered dividend growth.  This time TGT is the winner with a dividend growth rate of 20% over the past five years with COST a close second at 17.5%.  WMT has the lowest but very acceptable dividend growth over the past five years of 7.4%

Revenue Growth and EPS

Anyone who reads my blog, knows that I value revenue growth.   The revenue growth metric is the hardest of the group to fulfill in our current economic environment.  Costco is the only stock of these three that meets my 4% revenue growth hurdle.  Walmart has nominal growth at .82% and Target has negative revenue growth.

Balance Sheet

I use D/E (debt to equity ratio) to make a quick measure of the safety of a stock's balance sheet.  Many measures can be used and if you know how to read financial statements use whatever metric you think is best.  Regarding D/E it is interesting to note that Target has a D/E ratio greater than 1.  One is the max I could handle unless the industry carries very high D/E ratios.  In this comparison of three stocks WMT at .5341 and COST at .4273 are in the comfortable range.


The final tables present the scorecard, using my 2016 Dividend selection criteria for each of these stocks.

I have decided to add WMT to my 2016 portfolio.  Costco just does not deliver enough income to make it worth holding without covered calls to make up the difference and Target is too weak from a revenue and D/E view.

Consider WMT for the income producing portion of your portfolio.

M* MoneyMadam
Disclosure:  Long WMT