Monday, April 20, 2020

PRU Buy-write + Dividend makes a senior happy

  •  Buying on fundamentals remains a good strategy for conservative, ordinary investors.  We like real numbers that we can understand rather than complicated stock analyst stock picks.  We want yield.
  • They say if you like it at $100, you should still like it at $50.  These words of advice are based on the fundamentals you used to buy a stock in the first place.  Unless the fundamentals have changed, you should have some confidence in your buy.
  • When you have to put your money to work for income, the underlying stock has to have a solid, safe and preferably growing dividend.
  • Using a Buy-write strategy can boost your income.  Adding to your position at a lower cost basis is one way to put your cash to work and when you can simultaneously sell (write) a call on those new shares, you can pocket the quarterly dividend and a call premium.  If you are called away, you still own the shares from your previous buys.

The example I site today is Prudential, symbol PRU.  I published a post on PRU earlier this year.  My original basis is $96.00  and I added today at $53.80.  Let's review the PRU fundamentals and then look at the additional shares I added and the calls that have enhanced my income.

PRU Fundamentals:  


Buying a stock with a high dividend yield is scary.  I have to be sure the stock I bought will continue to pay the dividend through thick and thin.   I can handle price cuts, but I cannot stomach losing income.

Some of the metrics I used are:  
  • Earnings per share have to be greater than the dividend paid out.
  • Revenues have to be growing enough to support Earnings per share.
  • We want a solid balance sheet
  • In this market, we don't want to pay a premium for our shares
Here is how PRU stacks up.

PRU Earnings Dividend
 Earnings > Dividend $10.27 $4.40
 Debt to Equity 0.35
 Dividend Yield 8.18%
 3 Yr. Rev. Growth 2.86%
 P/E Ratio 5.6

I like what I see.  A very hefty yield on shares that are down by half from a 52 week high of $106 but off their recent lows of $38.62.   Is the dividend safe?  Nothing is perfect but even if earnings are cut in half, PRU can still cover the dividend.  D/E (debt to equity) ratio suggests a very solid balance sheet.  Even with the headwinds, it's is highly likely PRU will not go out of business.

First Buy/write strategy:


A Buy/Write strategy as defined by Investopedia is:

"Buy-write is an option trading strategy where an investor buys a security, usually a stock, with options available on it and simultaneously writes (sells) a call option on that security. The purpose is to generate income from option premiums."

Read on to learn how I used a Buy/Write strategy on Prudential. 

My buys prior to today illustrate that I stick to my knitting.  I am not publishing this as a theoretical view.  I actually add as a stock goes down when I like the fundamentals.  Prudential is the stock. 

  • Feb. 6 and 12 = $96
  • Feb 28 =$74.50
  • Mar 12 = $48.30
I received the dividend of $1.10 on the Feb 6 and 12 buys as the stock was ex-dividend 2/14.  

On March 2, I sold (write) calls on the Feb 28 buy.  I chose the May 15 expiration.  PRU has not announced the next ex-dividend date.  However, looking back at the last three May ex-dividend dates, they were all before this call expires.  Since most calls expire without being assigned, I expect to receive a dividend on all my shares even those that are on call.  

I picked a strike price of $82.50 because I wanted at least a 10% gain on my shares if they are called away.  Remember I am using the shares with the $74.50 basis.  Being called away is not the outcome I want but it does happen and if I am going to lose such a prodigious dividend yield, I better bank a good profit.   

The premium I received on that March 2, 2020 expiration with an $82.50 strike price was $2.29.  That income alone is like receiving two additional dividend payments.  I call that a compelling strategy.   Who knows what is going to happen but since PRU is trading around $53.80, it has a long way to go to get to the strike.

I will sit with a stock that is below my cost basis just for the dividend.  If PRU does get back above my $74.50 basis, I will sell more calls.

As far as the $96 basis goes, I don't want to sell.  I want that juicy dividend.  

Today's Buy/Write


I added to PRU at $53.80.  I immediately sold a call on those shares.  

Two expiration dates had calls that expire after the next expected dividend date.  The May 15 expiration with a $62.50 strike was trading around a $1.00.  The dollar premium is an additional 1.85% of yield on top of PRU's dividend yield.

The expiration date I liked even better was the June 16, 2020 $62.50 because the premium was $2.00.  I sold (write) that call immediately. 

Price on Open Call Expiration 
PRU $53.78 6/16/2020
Cost Basis:   4/20/2020 $53.80
Strike Price: $62.50
Call Premium:  $2.00
Dividend  Expected before 5/15 $1.100
Call Yield on Basis 3.72%
Call + Dividend Yield on Basis 5.76%
$ Gain if Assigned $11.80
Max Return  if Assigned 21.93%

While the over 21% max return is impressive, the stock has to be called away to get that return.  What is more important is the income created from PRU.  On this lot of shares alone, I have already received $2.00 per share and I fully expect to receive the quarterly dividend of $1.10 per share.  Combine those two sources of income and the yield for this 2 month strategy is 5.76%.  

On the original buys, I received one quarterly dividend already plus the call premium of $2.29 and I expect to receive the dividend on all the shares.  I don't like being down by half, but I am hoping the PRU can continue to deliver the dividend and maybe even keep up the 10% dividend growth.

I constantly work my stocks to create this kind of income.  Sometimes I add tiny numbers of shares until I get 100 shares that pay me a dividend on which I can sell (write) a call.  Where else can a senior get income unless you  become a packer at Publix.

Good income investing.

M* MoneyMadam


Disclosure:  Long PRU with calls