Showing posts with label Caterpillar. Show all posts
Showing posts with label Caterpillar. Show all posts

Tuesday, December 17, 2019

Quick 7% on CAT

Executed this quick call today.  Call expiration is 30 days away and falls on same date as CAT's ex-dividend date.  So let's see what happens.  I added shares and sold this call today.

Quick gain of about 7%.

M* MoneyMadam
Disclosure:  Long CAT with calls
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Friday, October 4, 2019

Simple conservative income investing: Call opportunities on CAT and WSO

Today, the market is up and I take advantage of those moves by looking for additional income from covered calls.  I am not an options trader.  I use call options to boost my income because there are few sources of good yield at a reasonable price.

WSO is a good dividend stock that moves up and down with international news, tariff news, exchange rate news.  The company likes to share income with investors through dividends.  And they increase the dividend routinely.

You may not want to risk selling a call on WSO but I do sell calls on some of my position and have benefited from that strategy.   Here is a call I sold today on shares I added in February

I like to keep things simple and you can clearly see how using calls can boost income.  The call premium is equal to the quarterly dividend.  It is like getting five dividends this year.

Caterpillar is even more volatile than WSO.  Lately it is an unloved stock.  I buy and sell calls on it and I do not worry about losing it because it seems CAT's price always goes down after it is called away and I buy it back, cash the dividend check and sell a call to someone who thinks the price will go up.  Quite often they are right but I do not care as I do this for income.  

Again you can see the advantage of selling a call that pays you a juicy premium but also captures the next dividend.  In this case the call premium is greater than the quarter dividend.

This post documents how simple, conservative income investing can work for the ordinary investor.

M* MoneyMadam

Disclosure:  Long WSO and CAT with calls
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Friday, July 12, 2019

Another CAT call

I like Caterpillar's volatility.  I just buy CAT, cash the dividend check, wait for some headline news, sell ad call, have CAT assigned and then start over.   At some point this may stop because CAT either goes up too high and I don't have the chance to add on dips, or CAT goes out of business.  I don't think going out of business will happened.  And while we wait for the global growth needed to spur growth at CAT, I will use this yellow machine as a piggy bank.

M* MoneyMadam
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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

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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

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Tuesday, October 23, 2018

Caterpillar is not going out of business. Adding with a call

Caterpillar (CAT) is part of my portfolio.   CAT can be compelling not because of the size of its products, but the size of the call premiums.   If you have ice in your veins, you might consider a trade like this one.

Note, I did not include the January dividend because the call expires on the day CAT is expected to go ex-dividend.  If we get the dividend that would be nice but this call gives a juicy enough return to go for it without capturing the next dividend.

M* MoneyMadam
Disclosure:  Long CAT with calls
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Tuesday, November 14, 2017

Dividend Machine Fundamentals applied to CAT

Caterpillar, symbol CAT,  is in recovery mode after quite a fall from grace.  Below I apply my dividend screening criteria to CAT to see if I should add it to the 2017 Portfolio.

Earnings per share greater than dividend paid out:

Caterpillar's latest two quarters illustrate the value of their management expertise.  EPS finally exceed the dividend paid out.  Creating more EPS than dividend paid out is a fundamental that I cannot breach. 

I went back to 2013 to take a look at how their EPS and Dividend payout looked.  You can see in the table below that CAT was a cash cow.

Does their recent performance suggest CAT has turned the corner. The proof that CAT has turned it around will be in their fourth quarter earnings.  The fourth quarter has been their weakest quarter over the past three years.

Dividend growth of at least 4% to beat inflation:

Dividend growth in the past was robust until they hit trouble.   As recently as 2015 the dividend increase was 10% and then held steady for eight quarters until a recent 1.29% meager increase.

Dividend yield of 2.75% or greater than 10 year U.S. Treasury.

Today the 10 year U.S. Treasury yield is 2.4%.   Cat's simple yield is only 2.29% which is below my threshold of 2.75% and below the 10 year U.S. Treasury.  However, when covered call options can make up the difference, I can buy a stock with that low a dividend.

Covered calls on CAT are trading but none are enticing.  I need to be sure I have at least an 8% gain on price basis and a 1% yield from the premium.   This translates to at least a $148 strike price.  The premium would need to be $1.37 and the expiration out far enough that I would get the dividend during the time between selling the call and the expiration date.  For CAT the expiration date needs to be after about January 20, 2018 which is the expected next ex-dividend date.

Debt to Equity Ratio 1 or less or equal to industry standard

CAT sports a debt to equity ratio (D/E) of 2.299 well above my limit of 1.   However, Caterpillar is in a n industry that requires a lot of capital.  Therefore, I looked at Deere, symbol DE, which is an industry peer to see how CAT compares.  Indeed, DE's debt to equity ratio is over 4 which makes CAT's balance appear to be within industry standard.

I think we still need to wait for CAT before it again appears as a Dividend Machine stock.   I use these four criteria for my initial screen for dividend stocks.  I don't stop there.  All investors have their own screening criteria any some of the more useful are data such as free cash flow, return on assets, even P/E ratio.   P/E ratio of CAT is over 95 and that is way too high for me.

Patience is a virtue and I will watch CAT.  I may miss the opportunity if the stock price continues to soar as fundamentals improve, but I will take that risk.

I still hold a little bit of CAT.  I sold calls on most of my holdings and these shares were assigned most recently at $100.   I still have shares from dividend reinvestment so I am hoping the CAT turn around is real.

Good income investing comes from executing a tested strategy with discipline and this is an example of that discipline.

M* MoneyMadam

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Wednesday, August 24, 2016

CAT hits highs

I hate to lose CAT, but I am selling calls anyway.  If it is called away before it corrects,  there is always another stock to buy. M*

Caterpillar: Questions Mount $CAT

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Tuesday, May 24, 2016

Caterpillar Free Cash Flow

If you are long Caterpillar or thinking about it, you should read this article. Caterpillar Free Cash Flow M*MoneyMadam

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Friday, March 4, 2016

Another CAT call

Caterpillar was a 2015 Dividend Machine.  In fact, I was so enamored with CAT's fundamentals that I profiled it twice in 2015.   Cost basis for those buys are $79.94 on March 9, 2015 and $85.30 on June 29, 2015. 

Clearly the 2015 portfolio has suffered and CAT is one of the reasons.    However, I believe it will claw back to life.  Headwinds such as the strong dollar and global contraction make predicting when that will occur a total guessing game. 

In between waiting to get back to better revenue and EPS growth, I see opportunities to make income.  For instance, look at this call that I sold today.

M* TheMoneyMadam
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Wednesday, January 27, 2016

CAT - WIll it bounce?

January 27, 2016

Catching a falling knife? Eight percent in 51 days but you could be left with a dead cat.

M* TheMoneyMadam

Disclosure:  Long CAT with calls
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