Friday, May 13, 2022

My favorite call of 5 that I sold - DVN

Underlying Security Symbol: DVN


While the overall market is up today, finding good call opportunities is not always a given.  If this is a stock pickers' market, it is also a call pickers' market.  I thought I would review some of my guidelines.

Picking the stock on which to sell a covered call:

  • Underlying security should be a bargain in terms of P/E ratio.
  • Underlying security should also have a strong balance sheet.
  • Cash flow must be greater than the dividend.
  • Dividend greater than 2 year Treasury yield.
  • Dividend Growth would be a positive influence. 
  • A catalyst to promote growth would also be a positive influence.

Picking the call:

  • Strike price around 10% of cost basis.
  • Expiration date captures the next dividend.
  • Call Premium yield no less than 1% of basis

In the case of Devon Energy, you can see that DVN meets the criteria listed above.   I am using P/E ratio to determine how much of a bargain it is.  DVN's P/E ratio at 11.6 is just a touch below the industry average of 12.  It is at the low end of its 5 year P/E range of 10.53 - 19.08.

D/E ratio is a decent guide to balance sheet strength.  Usually a D/E under 1 is considered good unless the company is in an industry with very high P/E's like Caterpillar.  In DVN's case, the D/E ratio of .72 is within industry standard and that is very acceptable.

You always want cash flow to be greater than the dividend.  In this case, DVN pays out only about half of its cash flow in dividends.  The yield of over 7% beats most other options and the most recent dividend increase was 27%.   For an income investor this is a good underlying security.

Thirty one analysts cover this stock and rate it as a buy or strong buy and of course the catalyst of demand for oil and the head winds for production imposed by our government suggest DVN should be able to sustain the dividend and enough growth that a call buyer sees interest.

The call displayed below captures all the criteria. Strike price is 8.85% above basis; expiration date is after the next ex-dividend date on 6/10/2022.  Call premium is 5.58% yield on basis. 









Underlying stock criteria:








I added today and sold calls on one half of my new position.  

MM MoneyMadam 

Data from and Marketxls and MSN Money

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