Showing posts with label Microchip Technology. Show all posts
Showing posts with label Microchip Technology. Show all posts

Thursday, April 21, 2016

Market timing with covered calls

Microchip Technology on trade fair Embedded Wo...
Microchip Technology on trade fair Embedded World a few minutes before opening the fair, Nuremberg, Germany 2008 (Photo credit: Wikipedia)

One of the many ways to use covered calls to manage your stocks is to use them to get rid of a stock.  


You should have a good reason to get rid of a stock because when you use covered calls with the idea of being assigned (the call buyer exercises the option and buys your shares) it happens a lot.  You do not want to use this strategy on stocks you will be sorry to lose.

This technique is really a timing mechanism.  I think the stock market seems a little expensive based on P/E ratio.  Times are uncertain locally and globally.  I lighten up on stocks that no longer meet my dividend stock selection criteria with emphasis on stocks that are over valued by P/E (price earnings) ratio.   Microchip Technology, MCHP is the stock I am writing about today.

Dividend Machine Fundamentals to decide which stock to sell.

I started using only four criteria to pick a Dividend stock and in 2016 I added two criteria.   My first four metrics were (1) EPS greater than dividends paid out (2) dividend yield of 3% (upped to 3.5% in 2014), dividend growth rate year over year (minimal 5 year growth rate upped to 4% in 2014), and D/E or debt to equity ratio of 1 or less or equal to industry standards.

In 2016 I lowered the dividend yield minimum to 2.75% but added two criteria (1) revenue growth over the past 3 years of at least 4% and (2) availability of covered call options that would yield at least 1% on each contract and a minimum of 8% capital gain over basis should the call be assigned.  In other words, the strike price has to be 8% greater than my basis.

Microchip Technology Dividend Stock Fundamentals

Microchip Technology (MCHP), my very first Dividend Machine, is still in my personal portfolio and I have been working the calls and receiving the dividend.  Now I am working the calls to get rid of Microchip.

Microchip violates two of my key criteria: it has a D/E ratio of 1.38 which is too high and the dividend growth rate is to low.   Moreover, I think the market may be overvalued and I think MCHP is ripe for selling because the P/E ratio is 30.38.   

MCHP's stock price appreciation has been quite good since I initiated a position in November of 2010.  My first buy was at $33.55.  MCHP trades to day about $49.50 for quite a nice gain.  My personal basis is $34.93.   The dividend yield is 2.95% which isn't bad but the dividend growth has been a tepid .869% per year which is another reason to dump it.

In an effort to grow, MCHP, bought another company, Atmel and is working through the process of making money from that acquisition.  I don't use that kind of news to make my decisions about dividend stocks.  I just don't know enough about it.  I stick to my fundamentals.

However, for those knowledgeable about the acquisition, you may be willing to wait for the acquisition to pay off.  Analysts think that indeed MCHP will grow and project a forward P/E around 18.  Due to the debt and slow dividend growth, I am still wanting to get rid of MCHP

Getting rid of MCHP with Covered Call Options

Now take a look at the list of calls that I have used to boost my income and more recently to try to get rid of MCHP.

As time progressed and I realized that that their debt was increasing and the dividend was not, I wanted to get rid of it so I sold calls very close to the current trading price.  So far, I have had no takers on my last 200 shares but I will continue to try.  You will see that I just sold May 20, 2016 calls for $.95 a contract.  Notice that the range of call premiums was $.55 to $3.80.

Actual MCHP Covered Call Experience

Covered call premiums on the 300 hundred shares in my Dividend Machine Portfolios have been good and all three hundred shares would have been assigned.  I bought at the same time I wrote about MCHP.  I personally bought 500 shares.  300 of my shares were assigned as they would have been in the model portfolios and I am left with 200 shares.

My basis on my remaining 200 shares is  $6,986 or $34.93 per share.  My basis on all 500 shares is $17,465.   My income from MCHP covered calls so far is $2,365.  Covered calls added  13.54% to my income.   That does not include dividends.

Strategy Keys

The key to this strategy is to select a strike price very close to the selling price and with an expiration date no greater than 30 days out.  You don't want to wait around while the stock price deteriorates to meet the deteriorating dividend fundamentals.   I sold my most recent call on April 19 with an expiration date of May 20. 

You want a really good premium.   If the call expiration date is before the next ex-dividend date, you want the premium to be even richer.   I like a minimum of 1 % plus the amount the quarter dividend that I may lose out on.  The most recent call premium was $.95 or 2.7% on my basis and 1.9% on today's price.

This is an example of how to use covered calls to time the market and get out of a stock that for one or more reasons seems over valued or under performing as a dividend machine.

M* TheMoneyMadam 
Disclosure:  Long MCHP with calls

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Sunday, October 12, 2014

What to do with Microchip Technology MCHP?

One of my earliest Dividend machines took a terrible tumble on Friday.   The tumble was deserved. Although I do not use P/E (price earnings) ratios to determine if a stock qualifies as a Dividend Machine, P/E is important when you try to decide what to do with a holding that crashes like MCHP did on Friday.

Microchip's P/E soared over the past few years and this was during a time when MCHP was absorbing an acquisition.  I was tempted to sell it because the yield on this inflated stock price was well below what I could get from another stock.    On the other hand, my cost basis of $33.69 is well below the current price.

During these times when traders buy stocks that are rumored to be have a lot of growth, MCHP had good rumors and a high stock price and a high P/E.    Covered calls are the obvious strategy to improve income but you can only sell a call when someone else wants to buy it from you.   For quite a while, MCHP had no calls.   Lately calls have been better and I have one half of my position on call (October $50.)  That means I could not sell those shares if I wanted to until the calls expire.

Does a lower P/E mean I should buy?

I will likely hold onto the other shares as this stock is still a strong income producer.  Unless covered call income is compelling, which to me is a call premium yield of at least 2% or about $.80 per contract, I will not add to my position.

Even if the stock price erodes enough that MCHP's dividend yield is more than 3.5% and the P/E is less, I will not add.  My reason is I need dividend growth and while MCHP has consistently increased the dividend, the increases have been meager.     But then I get the capital gain if the call buyer takes part of my position and that makes up for the meager dividend increases.   But I really doubt that my stock will be called away.   Therefore, I will look for new calls and hold.

A stock with a 3.1% dividend yield, low debt, a history of increasing dividends, and earnings that exceed the dividend payment, and has occaisional covered call income, is not a bad stock to hold.

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Friday, February 8, 2013


Microchip Technology, symbol MCHP is company very similar to Intel.  Both have qualified as dividend machines in 2011 and 2012 and now again in 2013.  Their dividend fundamentals are similar.   Often times, I own more than one company in a given space in order to diversify my holdings within an industry.


Microchip, like Intel, produces computer chips.  Both companies are mature.  Investors do not look to either company for rapid growth.   Their stock prices are stuck in a trading range and some analysts consider them dead money.   Yet each company has been a money machine for income investors.

Microchip Technology
Price when profiled
Last 4 Qtrs Earnings
Last 4 Qtrs Dividends
Current Qtr Dividend
Annualized Div Yield
No. Years Div Increase
Since 2002
Debt/Equity ratio

Microchip is a much smaller company than Intel and the stock price is a bit more volatile.  Over
the past year, MCHP bought another company in order to diversify the product line.  The acquisition was viewed with great skepticism and the stock price suffered.   In 2011 MCHP traded around $33 per share when I profiled it.  Early in 2012 MCHP’s stock traded around $37 per share when I profiled it.  Later in 2012 MCHP’s stock price slipped back to $33 per share.

Today, MCHP announced their most resent earnings and they beat estimates on both the top line and the bottom line.   Just as they have in the past, MCHP rewarded it shareholders by again increasing the dividend.

The table above presents MCHP’s dividend fundamentals.  With a yield of 4.16%, MCHP is a good buy.   They have a strong balance sheet and have shown they know how to use their cash.  In the past, MCHP has also offered covered call opportunities.  With the good earnings news, tomorrow may be a good time to look for covered calls.


MCHP, as a small cap. company, provides a little diversification in the computer chip industry.  I like to own more than one stock in industries as big as this.   Intel is a large cap stock.  

Consider owning both of these companies in the income producing portion of your investment portfolio.

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Wednesday, February 8, 2012

Microchip Technology Dividend Machine again

Image representing Microchip Technologies as d...Image via CrunchBase
Dividend Machine for week of February 6, 2012
            Earlier this month I profiled a high yield (read high risk) bond and that is new.  The stock market may seem boring but this week, so far, I have found two new companies that qualify as Dividend Machines but neither one has covered call options that could boost our income.  And, I have been waiting to profile a third stock that I included in the 2011 Dividend Machine list until covered call options on it looked attractive.
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Monday, November 21, 2011

Option Income - 2011 Dividend Machines

Option Income analysis – 2011 Dividend Machines
            Income investors, covered calls, as you know, are contracts that pay you money known as a call premium. These premiums can be as little as ten cents a share or as much as several dollars a share.  So you see covered calls can provide significant investment income.  In retirement, this is very important.

 In exchange for receiving the call premium, you give the buyer the right to buy your stock at the strike price of the contract. The strike price is critical because income
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Friday, April 29, 2011

Stopping Microchip Technology, MCHP - just in case!

Microchip Technology, MCHP has doubled during the time I have owned it.  It paid a healthy and ever increasing dividend. MCHP was my first dividend machine.  However, they did not pay a dividend in March and I believe this is due to the fact that they paid a double dividend in December.  In other words  the March dividend was paid in December along with the December dividend.
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Tuesday, December 7, 2010

Dividend Machines and Diversification

Diversification is one of the most important aspects of investing.

I try to profile companies that meet all our criteria as a dividend machine and also provide diversification. Never own just one company. One hundred companies are too many to own. Know your companies, what they do as well as their fundamentals.

Diversification is not just measured by how much cash you have versus the percent invested in bonds and stocks. Diversification can be measured in many ways. Let's look at the companies I have profiled over the last 4 weeks as an illustration of how to diversify with dividend machines.

11/14/2010 – MCHP Microchip Technology a smaller electronics company that makes microprocessors and receives about three quarters of its income from outside the U.S.

11/21/2010 – JNJ Johnson & Johnson a very large multinational company that is a big pharma, biotech, and band aid company. You get a lot of diversification in just one company.

11/28/2010 – GPC Genuine Auto Parts is both a producer of auto parts and a retailer with most of its business in the United States.

12/06/2010 – KMB Kimberly Clark a very large multinational company concentrating on consumer staples like tissue and diapers with sales in both the U.S. and abroad.

Look for companies that meet our criteria and that also provide diversification and sit back and watch your income grow.

Very Truly Yours,

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Tuesday, November 16, 2010

Covered Calls for more cash!

Dividend Machine, Microchip Technology has been a good company to create a little extra income in addition to its ever increasing dividend. 

Using covered calls to add income from your investments is one of the techniques, TheMoneyMadam, and all good income investors employ. 

To remind you about covered calls; when you own at least 100 shares of a company you can sell to another person the option to buy your shares at a set price (the strike price) within a set period of time. 

The other person obviously thinks the stock is going to increase in value and they are willing to pay you money to reserve the right to buy it at the strike price which almost certainly is below where they think the stock price will be in the future. 

This is a call option. The option gives the buyer the right but not the obligation. Therefore, if the stock does not perform as well as the buyer expected, they do not have to buy it from you and you pocket the cash from their buying the option. You risk being stuck with the company until the option expires if its stock price goes down. 

This risk is why I always recommend you buy stocks with dividend yields that are solid, and balance sheets that are solid. If you are stuck with the stock you liked it in the beginning and unless some huge fundamental factor has changed, you can sit with it cashing your dividends. 

Companies that have stock prices that move more than the over market can be identified by looking at their beta. Beta is a measure of price volatility. 

Microchip technology has a beta of about 1.13. A beta of 1 means the stock price moves just about in line with the overall market. A beta of 1.13 means MCHP is a little more volatile than the overall market. 

This situation provides the opportunity for selling covered calls. 

If you sell the right to buy MCHP to another person at a strike price at 10% above your cost basis and they exercise the right within 90 days you get the 10% gain, the cash from the covered call and probably the cash from the dividend. 

Another stock is always out there to buy, so do not be afraid to risk losing your stock at a 10% gain. Plus, with some volatility, you may have a chance to buy your stock again and repeat the whole procedure over and over. 

MCHP is a good example of this technique because I held this stock through the major downturn of 2008. I bought MCHP in October, 2007 at $36.50. I sold a call one year later at a strike price of $40.00 and received $1.60 per share for the call plus I had collected the dividend during that year. The market crashed, the call expired and I was stuck with the stock, but it is a stock I liked so I added to my position. I bought more at $31.87. 

I then wrote a call on those shares with a strike price of $35 and received $1.45 per share. I still held the stock because the market continued to deteriorate. When the market hit its low I added even more shares at $20.75. 

I continued to like the company and they continued to increase the dividend and I continued to cash that dividend. Finally I wrote a call for $1.05 with a strike price of $22.50. The market recovered and I lost the shares I bought for $20.75 at $22.50. I still own the other shares. 

I have not seen calls recently that I want to sell on MCHP but this exercise clearly illustrates how you can get 10% per year or more using covered calls on dividend producing stocks to create income.

Very Truly Yours,

Another Dividend Machine idea next week
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