Showing posts with label IBM. Show all posts
Showing posts with label IBM. Show all posts

Thursday, March 12, 2020

Shouldn't P/E ratios be really low if this is a buying opportunity for ordinary investors?

  • Stocks were over valued as measured by P/E ratios
  • Markets were heading higher on P/E ratio expansion
  • Looking for low P/E stocks in the Dow 30 reveals eight stocks to consider
  • Dividend Fundamentals remain of utmost importance

If you follow my blog, you know I have been writing about Dividend stock investing since just after I retired as an investment adviser in 2009.    To say I have been through this before more than once is accurate; to suggest I am immune to the pain is wrong.  However, I know that even with my shortened life expectancy, I am 11 years older than I was in 2009, quality stocks will continue to deliver the income I need to live my lifestyle.

FEAR NOT; BE PREPARED

I always advised my clients to have a debt free house to live in as one goal and to have money in stocks and bonds that are highly likely to continue to pay the income needed to support their lifestyle and in stocks that will increase that income over time.

I also advised my clients to have their rainy day fund always in safe, liquid assets even if it is painful to receive virtually no income from that stash.  For clients who have more cash than they need and for clients who expected to receive cash in the form of a bonus, or tax refund, or gift from Uncle Henry, you have to be willing to add stocks in downturn.

WHICH STOCKS?

Today I am looking at the Dow 30 stocks to find something of value.  Here are my criteria:

  • Good balance sheet, I use D/E ratio and interest coverage ratio
  • Dividend yield of more than 3% 
  • Dividend history during previous market disruption in 2009
  • Price correction that mirrors the overall market
  • P/E ratio under 15

Looking at each of these criteria I begin with balance sheet.  Companies have been adding debt because debt is cheap.  The old saying goes that you should borrow when you can not when you need to.   What are they doing with added debt.  Apple for example has a ton of cash around so they borrowed at cheap rates and used that additional liquidity to pay investors dividends.    Home Depot borrowed the money to buy back stock and increase the value of the shares held by investors.

Debt matters if the company cannot pay the interest on the loan and cannot pay out our precious dividends.  Therefore, looking at a combination of D/E ratio and interest coverage is a good guide for the ordinary investor.

It used to be that dividend yield needed to beat the 10 year U.S. Treasury but in today's world those metrics are unreliable as Treasury yields are so low, no one can live on them.  A more reliable yield for me is 3%.  If I get 3% on my portfolio, I will not suffer but I also will not be accumulating cash from the difference between my income and my expenses.  Yield is very personal and each investor needs to do their own math to determine the minimum yield they need.

Dividend growth is more significant for the long term investor who does not work for a living.  In 20 years everything will cost about double what it does now.  If you don't believe me, go back twenty years and look at the cost of ground beef, or your car insurance or your home owner's fees.  Even if a stock did not increase the dividend during the 2007-2009 debacle but resumed dividend increases after the crises abated, you are probably okay with that investment

Why buy a stock that has not corrected as much as the market?  Hard to find one of these but I do have an example.   This is a two handed assumption.  On the one hand, if you are buying during a market crisis, you certainly want a bargain.   On the other hand, if you find a stock that has held up well, maybe you have a winner that can weather any storm.  Again, investing is an individual process and only you can decide if a stock meets your personal criteria.

That lead's us to P/E ratio which the ratio of the price of a stock divided by the earnings.  Zacks reports the average long term P/E ratio of the Dow Industrials is about 16.  Ycharts shows a P/E of 22.29 on 12/27/2019.   Other sources show a range of as low as 7 and as high as 30.  In 2009 the Dow's P/E was about 15.  Hence, I picked 15 as a cut off.  

Note that while the DJI (Dow Industrial Average) is just that, you can find average P/E's for each stock you are considering.

I was quite surprised to find stocks that I have liked in the past but found to too expensive to buy or to hold to still have higher P/E's than I like and some with dividend yields below the 3% goal.  Johnson and Johnson carries a P/E/ of 24.23 and a yield of only 2.88%.  Apple carries a P/E of 21.13 and a yield of 1.21%.   Great businesses but I have to stick with my disciplined approach.

Here are the stocks  in the Dow industrial average that today meet the P/E criteria and the dividend yield criteria.  Some have higher D/E ratios than I like but all have positive interest coverage ratios.  Anything interest coverage ratio that is under 1 is too risky.  

Symbol Price P/E D/E Int.Cov. Yld Other Factors
JPM $88.92 8.72 1.42 2.7    3.00%       Neg Int Rates
CAT $90.97 9.69 2.58 19.63.23%     World Recession
IBM $104.48 11.15 3.27 8.6 4.83%      No Rev Growth       but new CEO
TRV $106.33 11.71 0.25 10.12.62%    Less than Dow        correction
PFE $30.78 11.78 0.83 12.2 4.18%     No Rev Growth
VZ $51.93 12.01 2.17 5.8 4.23%     Leader in 5G
XOM $38.74 12.46 0.24 25.2 6.78%      Oil Glut
CSCO $34.31 14.81 0.45 20.4 3.60%
*Price, Int.Cov. Yld from Market XLS P/E from Schwab 

Note the one stock that has not corrected as much as the market is TRV.

You should always look for more data on the stocks you are considering.  I noted in the table above some of the externalities that might color my decision to buy.

BE BRAVE, BE DISCIPLINED

M* MoneyMadam
Disclosure:  Long JPM, IBM, CAT, VZ, XOM, CSCO.   I have covered calls working on a portion of my holdings in each name.









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Monday, September 23, 2019

Best call today was WHR Whirlpool

Last Friday, September 20, 2019 was quarterly expiration of stock options.  As an active income investor, I use covered calls to create income.  I certainly cannot get adequate income from the usual sources for safe money like bonds.

I had 25 calls on 12 different stocks expire last Friday.  Five calls on two stocks were taken.  Four of the calls that were exercised were on Novocure, symbol NVCR.  Novocure does not qualify as an income stock.  I do not want to risk losing the rest of my position on NVCR.  Therefore, I did not even tempt myself by looking at potential calls on this growth stock.

The other call that was taken, also known as exercised, or assigned was J.P Morgan, symbol JPM.  All the other calls expired.  I got to keep the premium paid and now I am looking for additional calls on those stocks.

Listed below are the calls I sold today:

IBM:  $150 strike expired on 9/20/19







You will notice, I am underwater on IBM.  But I like the dividend yield of over 4.5% and I have sold 4 calls on IBM since I bought eighteen months ago.   I don't like it enough to buy more shares but I do like the call premiums.

In this call I created an additional 1.1% on my basis.  I am willing to live with the unrealized loss as long as I cash those dividend and call premium checks.







Whirlpool (WHR): $160 strike expired on 9/20/2019


Whirlpool is quite volatile.  It responds to a lot of "headline risk."  Tariffs and international sales of washing machines is more exciting than you think.  



Again I like the yield of 3.19% but I would like more than 3.19% and calls are a way to boost the income.  I have sold calls many times on WHR that have been exercised.  This time my calls expired and I was able to sell more calls today.

In this call alone, I was able to capture a yield of 4.53% just from the premium.  






Without a doubt Whirlpool was the covered call of the day.  This is good income investing.  If any other calls come available, I will write them up.  Stay tuned.

M* MoneyMadam

Disclosure:  Long IBM and WHR with calls 
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Wednesday, May 29, 2019

Two calls in a down market while I nibble

One problem of selling calls on quality stocks is that when they are called away at your strike price, quite often their stock prices continues to go up and you lose that opportunity.

The other problem with selling calls on even quality stocks is that you are stuck with the stock until the expiration even if the stock price is sinking.

Our current market makes clear the second risk preempts the first.  Readers know I work my portfolio with calls.  Often times I am in and out of stocks once of two a year.  I am unafraid of each risk noted above because I try to pick quality stocks.   

I added a small amount of two quality stocks today and immediately sold calls on them.  One stock carries a low dividend yield but all other Dividend Machine fundamentals are in order.  The other stock carries a high dividend yield and has a little more debt than I like, but I believe it is a quality stock that will continue to pay their big yield.

I like to get a minimum of 10% total return; capital gain, call premium, and dividend; when I buy a few more shares and sell a call for no other reason than to reap income.  Here are my two trades today.

Microsoft, symbol MSFT

























Dividend fundamentals include earnings of $4.50 are greater than dividend of $1.84 and debt to equity ratio of .77.  Negative is low yield of  1.47%


IBM, symbol IBM


























Dividend fundamentals include earnings of $9.50 are greater than dividend of $6.48.  Debt to equity ratio is 3.03 and that is a negative but it is offset by a dividend yield of 5.01% with plenty of cash flow to pay it. 


Nibbling for income.   Disclosure:  Long MSFT and IBM with calls

M* MoneyMadam

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Tuesday, September 3, 2013

Dividends & Income - How to Manage Microchip Technology - My Favorite Trade Today


Consider a smaller cap dividend company like Microchip Technology (MCHP) to provide diversification by company size and to juice your income.




Everybody is writing about Intel (INTC) and Qualcomm (QCOM) and IBM.  They suffer over the earnings, the slow growth, the future and of course the dividends.


These very large companies are good stocks to own but every income investor needs to be diversified by capitalization as well as industry.   The results of my work using my dividend machine strategy suggests that you can create a well diversified portfolio of dividend stocks using my four criteria and moreover, the smaller cap. companies perform quite well.

My Favorite Trade Today:

Image representing Microchip Technologies as d...
Image via CrunchBase
Today's I sold another call on Microchip Technology (MCHP.)  This was my favorite trade today. 


I have profiled MCHP as a dividend machine three times already.   The cost basis each time was $33.55 on November 14, 2010 (a 2011 dividend machine;)  $37.30 on February 8, 2012 (a 2012 dividend machine;) and $33.94 on February 7, 2013 (a 2013 dividend machine.)  

Clearly, MCHP has been up and down and that volatility has provided for very nice covered call income while I cash those ever increasing dividends.


MCHP Covered Call Analysis:


For the purpose of analysis, I will use the high basis of $37.30.    Today I sold a January $42 call for $1.00.    MCHP's all time high is $41.78.   I doubt that it will break out above $42 but someone else does and that is why they paid me $1.00 per share of additional income.   If I keep MCHP through to expiration, I will also receive their quarterly dividend in December.   See the table below to learn about the call  yield and the total gain opportunities.






Folks, this is how you work your dividend machines to maximize profit.


The Money Madam

Posts Related to MCHP as a Dividend Machine
2013-dividend.html

November 14, 2010
http://www.themoneymadam.com/2010/11/microchip-technology-dividend-machine.html

February 8, 2012
http://www.themoneymadam.com/2012/02/microchip-technology-dividend-machine.html




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Wednesday, April 6, 2011

INCREASING DIVIDEND - IMPORTANT FACTS

          Investment show experts take jabs at investors who buy companies because of the dividend.
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Wednesday, January 5, 2011

IBM Growth and Income Machine

Selling Covered Calls - an illustration for income investors.

TheMadam has always considered the income from writing covered calls a gift.   But there are criteria that should be employed when using this strategy to supplement your income.

One of my rules, as you may recall from my website, is to always invest your money in an instrument that pays you something while you hold it.   For both my income portfolio and my growth portfolio, I always try to employ that rule.

Covered calls are no exception.  When you write or sell (these terms are interchangeable) a covered call you covey the right to buy your stock to another person at a certain strike price and within a certain time frame.  You must remember that the person who buys your call does not have to buy your stock from you.  The option is totally the buyer’s.  Therefore, you always want your underlying stock to be a good one.  The stock should make money, have no more debt than other companies in its industry and pay you a dividend.

In October of 2008, I decided I wanted to own IBM.  At the time IBM paid a dividend of $2 per share per year and at the price I paid (100 shares at $81.60 and 100 shares at $77) the dividend yield was about 2.5%.   Now 2.5% is only ½ of the yield that I count on for my income portfolio so I need to make more money on either call premiums or capital gains from selling the stock to meet my goals.   But IBM has a history of increasing its dividend over time so that fact was a positive.  And its debt to equity ratio was within the range of comfort.  Further more, if the market tanked again like it did in March of ’03 I was pretty sure IBM would not go out of business.  You always want to be comfortable with the underlying stock in case you are stuck with it for a while.

IBM also seemed to be a good pick for my growth portfolio.     I have bought and sold IBM several times over my investing career and I was ready to buy again.  I decided not to reinvest the dividend because I needed the income to live on and I decided to write calls on it at ever increasing strike prices.   I was confident that the dividend, plus the call premium would more than meet my 5% income goal and I was also confident that if the purchaser of my call wanted IBM at the strike price that I would receive enough capital gain to meet my growth goal of 7%. 

Listed below are the actual transactions over the past 14 months on those two IBM buys.  So this is not just an illustration, is it actual history.

     10-27-2008  Buy 100 Shares net cost               $8,258.95
     11-19-2008  Buy 100 Shares net cost               $7,708.95

     Total amount invested                                      $15,867.90

     Income from dividends
        3-10-2009    $ 50.00
        6-10-2009    $100.00
        9-10-2009    $  55.00
      12-10-2009    $  55.00

    Total income from dividends $260.00

    Income from writing calls
        10-27-2008    $390.29  strike price  $85
        11-19-2008    $290.29    strike price   $85
        11-24-2008    $265.29  strike price  $90
        01-26-2009    $135.29  strike price $100
        01-28-2009    $150.29  strike price $100
        03-23-2009    $100.29  strike price $110
        04-02-2009    $  80.29  strike price $115
        07-13-2009    $  95.29   strike price $110
        07-27-2009    $100.29  strike price $125
        10-12-2009    $ 95.29   strike price $130
        11-04-2009    $ 96.29   strike price $130
        12-21-2009    $139.29  strike price $130

     Total income from calls     $1,938.48

     Capital gains from sale of first 100 shares when the buyer of the call exercised their right buy at $110.

     Total gain from sale           $2,831.81

My income yield over this 14 months has been 13.85 % well exceeding my 5% goal and the capital gain of the most expensive 100 shares was 17.85% again well above my growth goal.

Moral of this story is covered calls are an excellent strategy for income investors provided you invest in an underlying stock with great fundamentals.  Please note,  this is not a recommendation to buy IBM stock especially since it is selling at just about it’s all time high.  If my last 100 shares gets taken, I would be thrilled because there always another stock to invest in and write calls.
Very Truly Yours,
TheMoneyMadam
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Thursday, October 28, 2010

IBM Growth and Income Machine

Selling Covered Calls - an illustration for income investors.

TheMadam has always considered the income from writing covered calls a gift.   But there are criteria that should be employed when using this strategy to supplement your income.

One of my rules, as you may recall from my website, is to always invest your money in an instrument that pays you something while you hold it.   For both my income portfolio and my growth portfolio, I always try to employ that rule.

Covered calls are no exception.  When you write or sell (these terms are interchangeable) a covered call you covey the right to buy your stock to another person at a certain strike price and within a certain time frame.  You must remember that the person who buys your call does not have to buy your stock from you.  The option is totally the buyer’s.  Therefore, you always want your underlying stock to be a good one.  The stock should make money, have no more debt than other companies in its industry and pay you a dividend.

In October of 2008, I decided I wanted to own IBM.  At the time IBM paid a dividend of $2 per share per year and at the price I paid (100 shares at $81.60 and 100 shares at $77) the dividend yield was about 2.5%.   Now 2.5% is only ½ of the yield that I count on for my income portfolio so I need to make more money on either call premiums or capital gains from selling the stock to meet my goals.   But IBM has a history of increasing its dividend over time so that fact was a positive.  And its debt to equity ratio was within the range of comfort.  Further more, if the market tanked again like it did in March of ’03 I was pretty sure IBM would not go out of business.  You always want to be comfortable with the underlying stock in case you are stuck with it for a while.

IBM also seemed to be a good pick for my growth portfolio.     I have bought and sold IBM several times over my investing career and I was ready to buy again.  I decided not to reinvest the dividend because I needed the income to live on and I decided to write calls on it at ever increasing strike prices.   I was confident that the dividend, plus the call premium would more than meet my 5% income goal and I was also confident that if the purchaser of my call wanted IBM at the strike price that I would receive enough capital gain to meet my growth goal of 7%. 

Listed below are the actual transactions over the past 14 months on those two IBM buys.  So this is not just an illustration, is it actual history.

     10-27-2008  Buy 100 Shares net cost                       $8,258.95
     11-19-2008  Buy 100 Shares net cost                       $7,708.95

     Total amount invested                                              $15,867.90

    Income from dividends
        3-10-2009    $ 50.00
        6-10-2009    $100.00
        9-10-2009    $  55.00
      12-10-2009           $  55.00

    Total income from dividends $260.00

    Income from writing calls
        10-27-2008    $390.29  strike price  $85
        11-19-2008    $290.29    strike price   $85
        11-24-2008    $265.29  strike price  $90
        01-26-2009    $135.29  strike price $100
        01-28-2009    $150.29  strike price $100
        03-23-2009    $100.29  strike price $110
        04-02-2009    $  80.29  strike price $115
        07-13-2009    $ 95.29   strike price $110
        07-27-2009    $100.29  strike price $125
        10-12-2009    $ 95.29   strike price $130
        11-04-2009    $ 96.29   strike price $130
        12-21-2009   $139.29  strike price $130

    Total income from calls     $1,938.48

Capital gains from sale of first 100 shares when the buyer of the call exercised their right buy at $110.

Total gain from sale           $2,831.81

My income yield over this 14 months has been 13.85 % well exceeding my 5% goal and the capital gain of the most expensive 100 shares was 17.85% again well above my growth goal.

Moral of this story is covered calls are an excellent strategy for income investors provided you invest in an underlying stock with great fundamentals.  Please note,  this is not a recommendation to buy IBM stock especially since it is selling at just about it’s all time high.  If my last 100 shares gets taken, I would be thrilled because there always another stock to invest in and write calls.
Very Truly Yours,
TheMoneyMadam
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