Wednesday, March 28, 2018

LHO hotel Reit rejects PEB buyout offer

Let's hope this merger rejection will do the trick for LHO, LaSalle Hotel Properties.  https://seekingalpha.com/news/3342225-big-rally-hotel-reits-pebblebrooks-proposal-lasalle?app=1&uprof=46#email_link

  • Dividend Growth does not always lead to future dividend growth
  • One or two underperforming properties in a small portfolio can cause significant financial impact
  • A strong balance sheet provides some safety to holding LHO

Dividend Growth


I bought LHO for the yield.  My basis is $33.45 above the $28.94 where LHO trades today.  Current yield is 7.22%.  Yield on my basis is 5.38%.   Look at this dividend growth chart.  This is the kind of dividend growth that makes an income investor salivate.





As soon as I bought LHO for both the yield and the dividend growth, they stopped the dividend growth.  Suspension of a dividend is devastating but holding the dividend steady is acceptable.


Small Number of Properties


This holding of the dividend is a result of reduced income which in the hotel industry is called "rev par" or revenue per available room.   Some of this is due to increased competition from a growing supply of upscale properties.  Some is due to their Key West Florida property damage from Hurricane Irma.

LHO is investing in their properties as they take on the competition.  During renovations, rev par can be affected negatively on a short term basis.  Will the renovations stimulate rev par in the future?

Solid Balance Sheet


I can live with the over 5% yield on my basis while there are few options to obtain that yield elsewhere. Moreover, I don't think the company is in jeopardy of going belly up.  D/E (debt to equity ratio) is .447 (source ycharts.)  Strength of the balance sheet allows me to continue to hold.


Pebblebrook, symbol PEB, another REIT in this space,  has made an offer for LHO at about $30 a share.   LHO rejected the buyout offer and for me I am happy about that as I would like to get back my basis.  Perhaps, PEB will up their offer or perhaps another acquirer will show up.  Or maybe LHO will stay independent and return to Rev Par growth that will feed dividend growth.

This is one holding I will watch carefully.  I am not interested in PEB with a yield of 4.53% and a much higher P/E ratio than LHO (PEB = 29 and LHO = 18.)  PEB also does not have particularly impressive revenue growth.

Clearly, in this case, dividend history was no predictor of future dividend growth.  With a solid balance sheet, risk is not huge, but I am underwater and will hope for a more robust buyout offer.  At least it is some encouraging news.

M* MoneyMadam
Disclosure:  Long LHO

Friday, March 23, 2018

APPL call in a down market

Take a look at this call for Monday?





M* MoneyMadam
Disclosure:  Long AAPL with calls

Market update?

Whiplash !!!

Monday, March 19, 2018

Investor Fatigue

These weeks of 1,000 point swings are going to continue.  Investors are getting fatigued.  Other factors way on our psyche.

  • Interest rates are going up
  • Price to Earnings ratios are high
  • Domestic uncertainty is evident every day
  • Investors are locking in profits

Rising Interest Rates


The big boys who manage big money and the professional investment pundits worry about interest rates.  After a 35 year bull market in bonds, things have changed.  Their reasoning is that increasing interest rates and its first cousin inflation have a negative effect on stock prices.


The graph above, courtesy of marketoracle.co.uk shows interest and stock prices since 1962.  This graph cannot begin to tell the real story because during the entire period of time interest rates were going down and stock prices increased.   

You might notice that stock prices have been up and down over the past 20 years and interest rates were pretty steady.   

Closer inspection using the period 2010 through 2012 is more revealing.  Again from marketoracle the graph below comparing interest rates and stock price reactions.


For me, the interest rate argument does not affect my stock picking at this time.  I am starting to ladder some certificates of deposit but I have not yet bought any new corporate bonds.  Just taking this move steals assets from the stock market so perhaps interest rates do have an effect if only to be competitive.

High P/E Ratios


I look all the time at stocks that have been good performers in the past and I see them over priced.   Look at Caterpillar, symbol CAT.   Caterpillar is one of only a couple of stocks that I added twice in any single portfolio year.   The portfolios that I publish have to hold but I don't.  

I lost CAT to a call at $120 and it is now trading above $150 and has been as high as $173.  Truly lost opportunity, right?  So does the $150 a share seem like a bargain?  No.  Why? Because CAT has a P/E ratio of 120.  Will, CAT ever be back to $120, I don't think so. But I cannot invest in an income stock with a P/E of 120.  

Sticking with CAT as an example, if their earnings improve as they are predicted to do so and the price stays basically the same, the forward expected P/E ratio is about 15.5 (source Nasdaq.com.)  Moreover, they will finally have returned to earning more than they pay out in dividends.  What if those earnings don't show up?

This is the biggest conundrum, I believe.   The stock market is priced to expect very significant earnings increases. Those stocks that deliver will be rewarded.  Those that do not will be punished.  Some that are punished will unfairly suffer if their previous quarter was good and the expectations are just too much to ask for.    These are stocks I will be looking at.

Current S&P 500 P.E. ratio is 25.99 which is quite high.  See the table below (again from marketoracle) showing long term P/E ratios.




Domestic Uncertainty


CNBC reported during the end of trading today, they thought there was rotation into international stocks.  Investors do think the U.S. is a bad place to invest.   They rotate because they think the international market is better at this time.  

Trade and tariff issue are in the news hourly.   Clearly it was a trade and tariff issue that culminated in the colonies leaving the Crown so trade issues cannot be ignored.  Look at Whirlpool, symbol WHR.    The government gives them a carrot by restricting cheaper Asian washing machines then hits them with a stick by increasing the cost of the metal they need to make their washing machines by putting tariffs on imported, cheaper steel.

They always say the market can handle good new and bad news, it cannot handle uncertainty.  We have uncertainty and this is one of the catalysts leading to investor fatigue.  Investors have not pulled totally out of the market.  There has not been the "c" word:  capitulation.   Investors, especially income investors are just going to sit and wait until a real opportunity is revealed.

Taking some Profit off the Table


I bought a few stocks a few weeks ago when the market had a bit of a correction.  Most of the stocks I bought were for income and income growth but I did play a little on some growth stocks. I sold calls on the growth stocks and they were all taken last Friday, thank goodness.

Now I look at stocks like XOM and WMT and I am underwater on the shares I added during the "correction."    I am not interested in selling these stocks as over time I still believe they will deliver the mail box money I need.  But I am not interested in buying more at this point.  I will reinvest dividends during these weak times.

Also during this time, I sold calls on some very good stocks that have tepid dividend yields and high P/E's such as AMGN.   AMGN has a P/E ratio of 71.   I was glad the call buyer took about half of my shares.  I am totally willing to lose AMGN.  However, should AMGN correct enough while growing its earnings enough to lower the P/E, I will be back in.

In the meantime, I am holding onto the cash generated by having call options exercised.   I actually am putting it in 30, 60, 90 and 180 day paper.    This relieves some of my investor fatigue.  

M* MoneyMadam

Disclosure:  Long CAT, XOM, WMT and AMGN with calls


Thursday, March 15, 2018

Nucor Earnings

Nucor, symbol NUE, earnings update.

M*   Long NUE with calls


Tuesday, March 13, 2018

Breaking all my rules with these trades

I want to increase the cash flow from my portfolio. To increase cash flow, covered calls are a technique used by many portfolio managers.  Covered calls are the only options I sell and the only options I write about in this blog.  I decided to employ some of the capital in a Conversion Roth IRA and I decided to take more risk than in my dividend growth portfolio.

  • Short expiration dates with high premiums
  • Continue to sell calls even on stocks that are underwater
  • Exit strategy for dividend paying stocks is to have them assigned.


Let's take a look at the stocks I bought so far and the income generated.  I am not concentrating on growth companies or value companies.  I am looking for stocks with vigorous calls.   Although I expected to roll the calls quickly using expiration dates not far out.  However, I have deviated even from that idea with at least one stock and that is call I sold on RIOT a very speculative block chain stock.  

QCOM:  Qualcomm


Qualcomm was the first stock I bought at $64.87.  The $70 call on QCOM which paid me $1.25 will expire this Friday 3/16/2018.  Based on how QCOM is trading with the news that their being acquired by Broadcom is dead QCOM is below my cost basis.  Therefore, I expect the call to expire.   I will immediately  begin looking for another call next week.

QCOM has the advantage of providing a nice dividend. My cost basis is $ 63.12 when including the call premium and the dividend.  I do not have an exit strategy on QCOM and I am hoping to work the calls to yield significant income.  

NUE:  Nucor


I invested a lot of money in Nucor: 400 shares at $66.60.  I sold a February $70 call and received $1.35. The call expired and I immediately sold a $72.50 call on all shares with an expiration date of April 20, 2018.  Like QCOM, Nucor pays a dividend which I should get provided my shares are not called away prior to 3/28/2018.  My cost basis is now $63.82.

Again, I do not have an exit strategy on NUE, I will continue to sell near the money calls with short duration expirations and high premiums.


RIOT: Riot Blockchain


RIOT is a total departure from my typical strategy.  I bought this stock at $21.08.   My first call yielded quite a nice income of over 10%.  But the stock has crashed and burned.  My first call expired and I immediately sold another call but had to go out to June to get a decent premium of $1.00.    Right now my cost basis is $21.08 less the income of $3.25 or $17.83.

RIOT could go belly up by then, it could also easily go up enough that my stock is assigned at $12.00 and I would have lost $5.83 or 32.679%.  My exit strategy is to have this stock assigned or have it go belly up.


AAPL:  Apple


And then I invested in AAPL at $176.98.  My first call for a strike price of $195  expires on April 20, 2018.  I received a call premium of $2.25 and the dividend of $.63 making my basis $174.15.  Today Apple is trading at about $181.30 so I am in the money but not yet at risk of having my shares called away.   AAPL's all time high is $183.50.

Like every stock that pays a dividend, my exit strategy is to have this stock called away at some point while I sell calls as often as I can at the highest premium possible.

TWTR: Twitter


This trade is more emblematic of what I want to do in this account.   I bought TWTR at $25.91 and sold a call with an expiration of just 4 days away.  I received $1.15 for the call.  It was exercised at $27.   My income on this stock is 8.64% in just four days.  

Twitter is also an example of how selling covered calls limits upside potential.  Today TWTR is trading at $34.185.   You could buy TWTR today and sell a call 31 days out (4/13/2018) at a strike of $36 for a premium of $1.10.   Not as compelling as the four day call.

I am going to bank my money from Twitter and use it to fund my next buy.

GILD:  Gilead


And that next buy was Gilead at $79.99.  I sold a May $87.50 call for $1.10 and I should receive the dividend of $.57.  Like the other dividend stocks, I do not have an exit strategy other than having this stock called away.  

Gilead's high is $123.37 and I just may have my shares assigned.  If so I make 11.72% in a very short time frame.   If my call expires, I will continue to sell calls.

The Table below presents all the information on these trades.







I currently have $62,822 working and my yield so far this year is 4.51%.  As with all my portfolios, I will report on the results no matter what the outcome.  I write up these ideas so I can learn, as I hope my readers learn, what works and what does not.

M* MoneyMadam

Long: all stocks in the table with calls.  



Wednesday, March 7, 2018

High Yield Bond - MoneyMadam's history

High Yield Bonds were enticing for income investors, including me, while we were in a low interest rate environment.


  • High Yield Bonds are not for beginners
  • Pay a steep discount
  • Risk is high

Since I started writing this blog about income investing,  I invested $81,670 in high yield bonds.  Each buy was for 10 bonds.  Eight different bonds make up the portfolio.  

TheMoneyMadam's High Yield Bond Portfolio


The table below lists the bonds I bought with CUSIP, coupon rate, and maturity date.  The portfolio holds only one of the eight bonds.  The others defaulted, were redeemed or tendered.  





It was a rocky and mostly unsuccessful venture.  My $81,670 turned into $72,949 not including income.  That is a 12% loss.  When adjusted for income the loss is cut to 4% but I don't like losing money.

If you read the dividend ideas on this blog you will see over the same time frame, I bought $875,687 worth of stocks.  The high yield bonds make up about 9% of the investments that I track in my portfolios. That alone is a good lesson. If you are going to take risk, you must keep it to a minimum.

It is a tricky business that requires even more due diligence than buying a dividend stock. Bonds are distressed for a reason and that is risk.

Entering a Bond Bear


As we leave the 35 year bond bull market and enter what I believe to be a 20 year bond bear market, high yield bonds are not as necessary even though they can be very rewarding (see Noble Energy Bond above.). 

I intend to ride the new cycle of increasing interest rates.  For average risk bonds I would like 5% for five years.  When bond prices decrease enough that I can get 5% for five years, I may change my mind and want more.  We will see.  

Since I believe interest rates are going up, I think there will also be high yield opportunities.  There is always some company that needs to pay just a little more to get financing.  It is our job as investors to find the right companies.

As I find bonds I like, I will write them up on this page and I will add them to the portfolio so you can measure how I have done.

M* MoneyMadam

Disclosure:  Long Cinemark Bond However since the price is above par, I am tempted to sell soon.  However, the next call price is $102.563 in April.  I may wait until that call date.

Tuesday, March 6, 2018

Added more Chevron now selling a Call

I have been an owner of Chevron for a long time.  Chevron, symbol CVX, is in my 2011, 2012, 2013,2014 and 2015 portfolios.  Then the price of oil crashed creating major chaos in the oil companies.  I added and then sold a call; my reasoning is presented below.

  • EPS have returned and now exceed dividends paid out
  • Dividend yield far exceeds 2 year U.S. Treasury
  • Dividend growth returns and exceeds inflation
  • Balance sheet is strong as measured by D/E ratio

Recently, when the over all market weakened I added some more CVX at $113.15.  This did not seem wise when CVX traded at $108.90 intraday on February 22, 2018.  I am reminded that you cannot pick a precise bottom.

CVX Fundamentals


Chevron's earnings have finally rebounded as the price of oil has improved and CVX has made some structural changes.  Finally E.P.S (earnings per share) are exceeding dividends paid out.

Fundamentally, Chevron's 4% yield provides much better retirement income for me than a 2 year U.S. Treasury.  Moreover, dividend growth has resumed.  CVX's most recent dividend increase from $1.08 to $1.12 is an increase of 3.7%.  I prefer 4% dividend growth but 3.7% beats current inflation.

Chevron's dividend history is interesting.  They don't suspend the dividend but when they need to husband cash, they will provide a minimal dividend increase.  When cash flow is more robust, Chevron shares it with its share holders.

Lastly, Chevron's D/E ratio is a mere .2855 which is quite low for a company that needs a lot of money to do their work.

Selling CVX Call


Today, Chevron is trading above $114 so I am finally in the money of this latest lot.  I sold a call today that varies a little from my routine.  I selected a June 15, 2018 expiration date.  This is about 10 days longer than I usually go out.  My reason is to get the May Dividend.  May's ex-dividend date has not yet been announced but it should be about May 17 and the May call expires May 18.  Therefore, I selected the June expiration.

See the table below for the trade details.



I intend to stay long CVX but it is not the only oil company I have in my portfolio so I don't want too much.  Overall, I am encouraged by a few articles in the Wall Street Journal today about the strength expected in the price of oil which will help CVX and my other oils.

If the call buyer does take my extra share, that is fine with me.  I love a greater than 12% gain in under 120 days.

M* MoneyMadam
Disclosure:  Long CVX with calls

http://www.themoneymadam.com/2011/01/dividend-machine-chevron-cvx-11-of-52.html
Boost your yield on CVX to over four percent this year!
http://www.themoneymadam.com/2014/01/dividends-income-2014-dividend-machine_20.html
http://www.themoneymadam.com/2015/04/a-four-year-history-of-cvx-next-2015.html

http://online.wsj.com/article/SB11796467727259013743904584081183365492134.html?mod=ITP_businessandfinance_0

Friday, March 2, 2018

AMGN defies the trend

Amgen, symbol, AMGN has been in my portfolio for a while.  I most recently added in November of 2017.  I have sold calls on my position many times and today is another example of this strategy.

  • AMGN has history of EPS greater than Dividends paid out
  • D/E ratio is a bit high
  • Dividend on par with 10 year Treasury
  • Covered Call options enhance income

First, lets look at AMGN's fundamentals. 


On first blush AMGN would not pass my criteria test because EPS of $2.57 are much less than dividends paid out of $5.28.  However, this is an aberration.  AMGN took a big write-off in the 4th quarter of 2017.   Without that write-off AMGN has consistently produced earnings in excess of dividends paid out and this is one of the "moats" that I use to quell my nerves.

The table below is courtesy of Nasdaq.com


  Revenue / EPS Summary *  
 
 Fiscal Quarter 2017
(Fiscal Year)
2016
(Fiscal Year)
2015
(Fiscal Year)
March      
   Revenue $5,464(m) $5,527(m) $5,033(m)
   EPS 2.79 (3/31/2017) 2.5 (3/31/2016) 2.11 (3/31/2015)
   Dividends 1.15 1 0.79
June      
   Revenue $5,810(m) $5,688(m) $5,370(m)
   EPS 2.92 (6/30/2017) 2.47 (6/30/2016) 2.15 (6/30/2015)
   Dividends 1.15 1 0.79
September      
   Revenue $5,773(m) $5,811(m) $5,723(m)
   EPS 2.75 (9/30/2017) 2.66 (9/30/2016) 2.44 (9/30/2015)
   Dividends 1.15 1 0.79
December  (FYE)      
   Revenue $5,802(m) $5,965(m) $5,536(m)
   EPS -5.77 (12/31/2017) 2.61 (12/31/2016) 2.36 (12/31/2015)
   Dividends 1.32 1.15 1
Totals      
   Revenue $22,849(m) $22,991(m) $21,662(m)
   EPS 2.69 10.24 9.06
   Dividends 4.77 4.15 3.37
   Previous 3 Years
 
 
©2018, EDGAR®Online, a division of Donnelley Financial Solutions. EDGAR® is a federally registered trademark of the U.S. Securities and Exchange Commission. EDGAR Online is not affiliated with or approved by the U.S. Securities and Exchange Commission.


AMGN yields 2.8% which is pretty close to the 10 year U.S. Treasury.  I need more income than a 10 year treasury or I would buy the more safe treasury.  

AMGN carries a debt to equity ratio (D/E) of 1.158.  My rule for D/E ratio is less than one or within industry standard.  A good comparison is Gilead (GILD) which carries a D/E ratio of 1.395 making AMGN's D/E respectable.   MSN Money calculates industry D/E average of .90 making AMGN's D/E ratio just a bit high.  If AMGN has a weakness it is this slightly elevated D/E ratio.


Two catalysts make me want to hold onto AMGN.   

  • Annual Dividend raises:  over 20% since 2015
  • Covered Call options:  add 1.13% to yield.

Today AMGN is one a few stocks in my personal portfolios that is up.  Moreover, a very nice call is available.  See the details in the table presented below.





I am not adding to AMGN at this time, I am however, working my portfolio for income on a stock that I feel has a good "moat" of safety.  The call expiration is only 49 days away.  While a call does limit upside potential, it also can limit my ability to unload AMGN should something go terribly wrong.  This is why I chose an expiration date less than 2 months.  If you go out further, you could capture the dividend in May, however, AMGN did not have any May calls available and I did not want to go out as far as June.


M* MoneyMadam

Thursday, March 1, 2018

Using Moats to quell my nerves

When I logged in today the DJI was up about 80 points.   I looked back to see what a ride while I was away and it appears today is no different.   Up and down in the same day.   Down 400 right now.

If you don't listen to the news, everything seems fine.  Once you log in and start paying attention, things don't look so good.

I will be writing up my research on various holdings as I determine if I have enough of a moat to weather a major down turn and yet enough exposure to benefit from an improving economy with head winds.

Stay tuned.

M* MoneyMadam