Showing posts with label WSO. Show all posts
Showing posts with label WSO. Show all posts

Friday, February 7, 2020

Is Watsco worth a quick trade?

Watsco, symbol WSO, is a bit soft today.  I am adding today because I need to put some capital to work.  Two IBM and two INTC calls were assigned yesterday and today which created some cash that I need to put to work.

What are my choices?  I could buy a 3 month CD or put it in Schwab's money market and get something like 1.5%.   I prefer to take some risk on this stock in exchange for a quick 2.17% yield from selling a call with an expiration date just 15 days out.  I am selecting a strike price that is close to my basis and I expect to be called away.   If these shares are called away in 15 days, my total return will be 3.38% in just 15 days.

Stock Price on Open Call Expiration 
WSO $172.95 2/21/2020
Cost Basis:   2/7/2020 $172.90
Strike Price: $175.00
Call Premium:  $3.75
Dividend  Ex-div after exp. $0.000
Call Yield on Basis 2.17%
Call + Dividend Yield on Basis 2.17%
$ Gain if Assigned $5.85
Max Return  if Assigned 3.38%


Let's say the market and WSO continues on a weak run and I am stuck with more shares of WSO.  That is okay by me.  WSO pays a very nice dividend and likes to raise the dividend.   Take a look at the fundamentals.

WSO Earnings Dividend
 Earnings > Dividend $6.42 $6.40
 Debt to Equity 0.27
 Dividend Yield 3.70%
 3 Yr. Rev. Growth 3.33%


Good income investing.   Use the interactive tool below to enter your basis, strike price, premium and if appropriate quarterly dividend to determine if the call available works for you.

Enter Cost Basis:
Enter Strike Price:
Enter Call Premium:
Enter Dividend if ex-div before Option Expiration:
Call Yield
GAIN
Total Return Percent if Assigned


M* MoneyMadam
Disclosure:  Long WSO 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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Monday, August 12, 2019

A case for Selling Calls for the Income Investor

Call income seems to accompany dividends as the best income tools for August.  Bond interest is so low and quality dividend stocks are so expensive.  Therefore, I sell covered calls on existing positions hoping I do not lose too much opportunity by having my stocks called away.

August is a pretty typical month for call expirations.  History tells us 90 percent of calls expire without action and 10 percent are assigned.   In the table below, I have 18 calls with August expiration dates.

As of today, I have 4 in the money which means the current stock price is above the strike price and 14 out of the money where the current stock price is below the strike price of the call. See the table below.



Only one of these stocks does not pay a dividend and that is YELP.  When I realized YELP was not going to perform quickly, I sold a call very close to the current price and my basis and am hoping it is called away which means the call buyer not only paid me a premium for the option but will also pay me the strike price.  That makes me even on the stock and the call premium in my pocket.

Three other stocks have low dividend yields, MSFT, NVDA and SWKS.  I consider a yield low if it is below the 2 year U.S. Treasury yield so SWKS with a yield of 1.99% may not be considered a low yield stock for some.

I like MSFT but with such a low dividend, as an income investor, I am willing to lose part of my position to the call buyer.  I am underwater on NVDA and will hope the China situation improves at some point.  I will continue to sell calls that are close to my basis so that I can unload NVDA in a similar fashion to YELP.

FOUR IN THE MONEY CALLS

The four income money calls are:   MSFT $135, WDC (Western Digital Corp.) $52.50, CVS $57.50, and YELP $34.   Expiration dates are August 16, 2019 except where noted.  My reasons for risking losing these stocks to the call buyer are:

  • MSFT - yield is too low
  • WDC - yield is good but not growing, EPS are less then dividend paid out but growing
  • CVS - (August 23 expiration)stock price is weak, I added to my shares that are underwater, and sold calls against the low buys
  • YELP - no dividend and stock price is not performing as hoped 

The downside of selling covered calls is two fold. one is lost opportunity.  The call buyer was right to pay you the money for the option to buy, they execute the call and then the stock soars and you miss out on the growth.    If you always look back and are cannot afford to lose a favorite stock, don't sell calls against your beloved stock.

The second risk is your shares are on call, the stock price tanks, you would like to get rid of the stock but cannot unless you pay money to buy back the call.   This risk is untenable for an income investor.  We don't pay out, we deposit funds.  The moral is to pick the underlying stock carefully.

FOURTEEN CALLS OUT OF THE MONEY

The 14 out of the money calls are listed below.  Each stock pays a decent dividend and I am willing to keep them.  I am hoping for additional volatility that may allow additional call selling.  But I am not in such a hurry to lose these stocks so I pick strike prices that I think are harder for the stock to attain before the call expires.  Expiration dates are 8/16/2019 except where noted.

  • MSFT - $145 low yield but upside potential for this very well run company 52 week high $141.68
  • COP - $67.50 nice dividend increases of 7+% recently  
  • LVS - $62, $65, $67.50 High yield with enough volatility that strike prices well above my basis are available.
  • M - $23 High yield with an improving balance sheet and very low P/E (price earnings ratio)
  • WSO - $180 Nice yield, with good fundamentals, headline risk due to global exposure provides strike prices well above my basis
  • SWKS - $82.50, $85 Decent yield, good balance sheet, nice volatility, I have been able to sell calls two - three times per year
  • WMT- $115 Walmart does not raise the dividend much and the yield is mediocre, strike prices near the 52 week high of $115.42 pay enough premium to make WMT a hold.
  • WDC - $55 High yield and improving fundamentals
  • SWKS- $81 (August 23 expiration) Decent yield but enough volatility to enjoy call premiums more than once a year
  • RDS.A - $63.50 (August 23 expiration) Very Good Yield, calls available only about once a year and I sell calls on only part of my position always above my basis and hopefully pick a strike price high enough that I am not called away.
  • NVDA- $185 (August 30 expiration) my worst performing stock of the group.  Not enough dividend to care if it is called away.   
In my case 22.22% of the calls are likely to be exercised versus the historical average of 10% but we still have to see what happens the rest of August.  This post illustrates how conservative income investors can use call options to boost their income during a time when quality dividend stocks are expensive and quality bonds are outrageously expensive.

M* MoneyMadam



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Sunday, November 26, 2017

Watsco wins Dividend Machine over 5 others

I need to finish investing the funds dedicated to my 2017 portfolio.  I have another $35,000 to invest and I really don't like buying in this market when everything seems expensive. Since the market seems expensive maybe oversold stocks are where I should look.

I screened about 400 stocks that were considered oversold using R.S.I. (relative strength indicator) of 28 - 30 and who deliver a dividend yield of 2.5% or more.   It was a waste of time. I found out there was a reason why every one of those stocks was in an oversold situation.  Most often they failed on balance sheet issues such as D/E ratio or revenue growth.

What I am looking for to finish my 2017 portfolio

  • More than 5% annual dividend growth over past 3 years
  • Home building materials, services or derivatives
  • Well managed balance sheet as measured by D/E ratio (debt to equity ratio)
  • Revenue growth that supports future dividend increases.

Since that screen didn't expose a great pick, I went back to the same screens I have used since I started writing this blog.   Beginning with yield, and making sure earnings are greater than yield.  I want revenue growth, dividend growth and a decent D/E ratio.

DIVIDEND GROWTH



Dividend growth is very important to me and that is because my expenses go up all the time.  I measure these things and I know it is the case no matter what the official measure of inflation suggests.

So I started my new screen with dividend growth in mind.   I don't want anymore retail, or health care.  We have a chip maker in the portfolio and a fast dining option.  (See the portfolio holdings below.)  Energy seems so overpriced and few banks pay enough in dividends to warrant inclusion.



Right off the bat I found WSO as an example of a stock in the industry I like with great dividend growth.  WSO is where I started.




SIX STOCKS FOR COMPARISON


While, dividend growth is the goal, I also know diversification is important.  Just look at my 2014 portfolio and you will see too much emphasis on energy.  Link to 2014 PortfolioSince 2017 is a small portfolio, I looked for stocks selling goods and services for the home.

I looked at Leggett and Platt (symbol LEG) because they make stuff for the home like faucets.  Watsco symbol WSO is in a similar space but they make HVAC equipment and supplies.   Home Depot (symbol HD)  and Lowes (symbol LOW) are another couple of stocks with products for the home.   Then I added in UPS (symbol UPS) and FedEx (symbol FDX)  because the ecommerce growth at both HD and LOW is significant and someone has to shipped that stuff.  These are the six stocks I analyzed for my next Dividend Machine pick.


I am always surprised when I do these comparative analyses.   I have been really excited about Home Depot but when I saw that their debt has exploded to a D/E ratio of over 10, I have to really consider unloading my position and moving into something else.

It won't be hard to beat HD's 2.07% yield but finding a stock with annual dividend growth of 30% will be hard to find.  Certainly Lowe's comes close.  Lowe's balance sheet is better than home depot but still at 2.89 it is a bit high.   I looked at one other big box stock, Big Lots and their D/E ratio is under .40.   Costco's D/E is .62.  Clearly both HD and LOW have more debt then their industry standard.  LOW's dividend growth rate of 26% is very enticing but their meager yield of 1.87% in view of the other criteria leaves me wanting

The UPS and FDX comparisons are interesting.  UPS has the better yield at 2.89% and acceptable dividend growth of 8%.  But, and it is a big but, their debt to equity ratio is more than 12.  This balance sheet is unacceptable to a conservative income investor.   FDX has much better control of its balance sheet with a D/E ratio of .91 and dividend growth of a mighty 50%.  The hair on this stock is the low yield of .78%.



When I see stocks with low yields, but good balance sheets and good yield growth, and good revenue growth I reserve them for my covered call category of income investing even though I cannot include them in a Dividend Machine Portfolio.  Since FDX meets these criteria, I looked for call options but found none to my liking.

This leaves me with Leggett and Platt (LEG) and Watsco (WSO.)  Purely on dividend growth, the first choice is WSO  with annual dividend increases averaging 36%.  Only HD in this list beats that kind of dividend growth. 

LEG as a contender


LEG has the highest yield but the lowest dividend growth of 5%.   With a 5% annual average increase, I can meet the expenses increases I am living through right now so it is respectable.

LEG has a D/E ratio just above 1.  This is not horrible like UPS or HD but it is higher than WSO's very low D/E ratio of .27.  Let's look more carefully at WSO. 

WSO Dividend Machine Fundamentals


Watsco has been of interest to me, the MoneyMadam, for quite a while; WSO is in each of these portfolios 2011, 2012, and 2016.   In 2012 when tax changes were on the horizon and dividends might be taxed at a higher rate, WSO pay five years of dividends early.   As an income investor, they have your back.

I always like to see revenue growth in a dividend growth stock.  For instance CSCO is very intriguing but their revenues are stagnant.  WSO has decent revenue growth.  It is no Nvidia (NVDA); WSO is not that kind of growth stock.  But income investors need to know the top of the funnel is being fed as well cash the end result - dividends.



Watsco is quite a cash machine and they continue to reward their investors by starting up the dividend increases again.  Take a peek at the table below to view the data I use to evaluate WSO.



What stands out to me is the P/E ratio which at 30.2 is a bit high.  Indeed Watsco is close to it's 52 week high.  Not exactly a bargain.  However, I need to invest some money for income and waiting has not been good to me.

WSO is going into the 2017 portfolio.  When the trade executes, I will post the data on the 2017 Portfolio Page.  WSO is a touch short on yield at 2.68% and touch high in price but I am not going to hope for a price pull back so I can say I bought WSO with a 2.75% yield.  The 2.68% yield is good enough when I look at the other fundamentals.

I may have paper losses if WSO corrects but I can live with that as long as my income continues.  Moreover, I can always buy more.

M* MoneyMadam

Disclosure:  Long WSO, LEG, HD

UPDATE:  Trade executed on Monday, 11/27/2017 @ $164.40.



 http://www.themoneymadam.com/2011/01/dividend-machine-wso-7-of-52.html

http://www.themoneymadam.com/2011/06/wso-covered-call-for-more-income.html

http://www.themoneymadam.com/2012/09/dividend-machine-for-week-of-9242012.html

http://www.themoneymadam.com/2016/01/watsco-wso-first-2016-money-madam-stock.html

http://www.themoneymadam.com/2016/02/watsco-wso-justifies-2016-portfolio.html
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