Thursday, January 24, 2019

CAT calls

I have been busy working a few positions and Caterpillar is one of them.  Caterpillar, symbol CAT, has been quite an income machine but it has also caused a lot of concern.  Caterpillar requires a lot of capital to build and distribute its big yellow machines.   CAT is very dependent on global growth.  I keep thinking some day Syria will be rebuilt and Caterpillar should benefit from that project.  While we wait for these catalysts, CAT is back to my basis. 

  • Waiting for a catalyst to boost Caterpillar's stock price.
  • Selling covered calls with a strike above my basis to capture more income than just the dividend.
  • Willing to lose CAT should the call be assigned because that will lock in gains and will make my portfolio safer as CAT has a very high D/E ratio.

At my age, I need a portfolio that creates income and I cannot live on 2.20% from rolling C.D.''s (certificates of deposit.)  With the dividend yield of 2.61% being less than I need, which is 4-5%, I turn to calls to boost my income.   The first table below shows the dividend machine fundamentals of CAT. 


To remind you, I like Dividend yield to exceed the 2 year Treasury at a minimum and CAT meets only that minimum.  Other dividend machine criteria include EPS greater than dividend paid out, dividend growth greater than implied inflation (3.8% annual inflation is a good number to use as it is the average over my investment life,)  

CAT is an excellent dividend grower and right now EPS are greater than dividend payout.  Finally a strong balance sheet is very helpful if you want to sleep at night without fear of the company having to reduce or cut the dividend or even go out of business.

CAT is volatile with a 52 week trading range of $173 - $112 making for some nice calls.  The table below shows a call I sold today.  

I selected a call expiration date of April 20, 2019.  The duration of the call provided a bigger premium.  However, the next ex-dividend date is expected to be right around the call expiration date and this means I may not get the dividend.  Of course, if the call expires as 90% do, I will get to pocket both the dividend and the call premium.  The next table shows the yield with the dividend included.

The difference is the yield from both the call and the dividend.  Unless the call is assigned, I will not book the capital gain, I will book only the combined amount of the dividend and the call premium.

This is just one example of working the portfolio for income.

M* MoneyMadam

Disclosure:  Long CAT with calls