Friday, March 22, 2019

HD nailing another call on Home Depot

I write extensively about Home Depot.    We all know the stores are really busy.  Your choices for home refurbishing include Lowes, and Orchard Supply maybe True Value or ACE.  But most of us find Home Depot to be closest to our homes. 

The negative on HD, as I have noted many times, is the amount of debt: 17.68 and growing.  The positives are the growth of the dividend.  Dividend growth over the past three years has averaged 32.36% per year.  You certainly don't need to worry about inflation with that kind of income growth.  Unless you're a politician or a professional athlete or an entertainer, you can't get that kind of income growth from your work.

I own Home Depot but am nervous about any holding in my portfolio that carries a lot of debt.  If I get rid of HD, I lose the dividend of 2.86% and the dividend growth.  My theory is I can find another stock with a similar yield and dividend growth with less debt.  But, it is not that easy.  AbbVie, symbol ABBV, has just over 22% per year dividend growth for the last 3 years.  ABBV also has balance sheet issues. FedEx, symbol FDX, has raised the quarterly dividend from $.25 March of 2016 to $.65 in March of 2019 or an average annual increase of 53%.  FDX carries a dividend yield of 1.5% and reasonable D/E ratio of .76.

Notice, I am not so worried that I am selling HD outright.  I hold it in a retirement account and do not have to worry about tax implications of the capital gain.  I also am not adding at this time.

Call Options using my personal basis.

In stead of selling it outright, I work the calls.  I just had a $185 call expire on March 15, 2019.  I have $190's working with an expiration date of May 17, 2019.  Based on the price today, I will most likely lose it.  Yet, that is what I thought about the $185.  Like 90% of calls, that $185 expired with no action.

$200 Strike with May  expiration

Today I sold another call on the shares not on call.  I like the $200 strike.  I will not get the dividend as the call expires prior to the ex dividend date.   Take a look at the math and you can see the call is worthy.

June expiration with $205 strike

For the investor with more appetite for risk and a low cost basis here is what a June expiration with a $205 strike price gets you.   Notice because the call expires after the next expected ex-dividend date, you should get the next quarterly dividend.  And you are more protected from upside potential.  Equally, you are stuck with your shares should they plummet while your option contract is in force.

While, I am not adding Home Depot at this time, for investors who are considering beginning a position and selling these calls on the new position, here is how they would fare using a cost basis from a trade today.

Call Options using today's basis 

May Expiration and $200 Strike Price today's Basis

To me the meager addition of income from this call is not worth the risk.  However, investors interested in going out further could consider the next call.

June Expiration and $205 Strike Price today's Basis

Home Depot has been a great stock for nailing income from dividends and calls.  I will not be sad if I lose it and I will not be adding today, but I enjoy working the calls in this up and down market.  After all, my priority is income investing.

M* MoneyMadam
Disclosure:  Long HD with calls