Tuesday, June 11, 2019

Another CAT call worth consideration

Yes, I still own some Caterpillar symbol CAT.  It has been an interesting ride on this big yellow money machine. 

Revenues peaked in 2012 then precipitously fell in response to global slowing.  My readers know I like stocks that fill the funnel with revenues which leads to earnings and dividend payouts  Therefore, it is odd when I add a stock with a suspect revenue history.

My theory is that CAT is more facile with its business operations than the average investor thinks.  They have been able to raise dividends because they manage their earnings well.  Lay that management execution over the improvement in business activity and we have the foundations for continued dividend payouts and dividend growth.

CAT has a rather large debt to equity ratio (D/E) at just over 2 but that is within industry standard.

Caterpillar's fundamentals are listed below.  Note the revenue trend has reversed and is growing.  Their 2019 first quarter revenue was an increase of  4.7% over first quarter revenue in 2018.  This is good news.

Yet, I am not so enamored with CAT that I am not willing to lose the shares I just added.   With that in mind, I sold an immediate call on CAT.   The table below presents the details of the covered call.  

I added CAT at $128 today.  I immediately sold a $140 August 16, 2019 call receiving a $1.55 call premium.  The expiration date is after the next ex-dividend date of July 19, 2019 which means I should also bank the quarterly dividend.   Add it all up and if they take my new shares at $140 my return is 11.34% on those shares in less than 2 months.

If I end up keeping CAT, I just added the premium of $1.55 to CAT's income.  With a full year of dividends and this one call, income from CAT adds up to $5.67 ($4.12 dividend + $1.55 call premium.)   That folks is an income yield of 4.42%.   Anything over 4% meets my target income goal.

The fact that I write a lot about CAT and execute these calls is evidence that CAT is a good stock to hold over time and work it for income.

M* MoneyMadam
Disclosure:  Long CAT with calls