Wednesday, February 20, 2019

Home Depot pros and cons

Home depot symbol HD is a prodigious dividend growth stock.  This is a positive for income investors.  The negatives on HD are the puny yield of 2.15% and a debt to equity ratio that has ballooned to 19.53.

Dividend growth is very important.  I have written about this so many times.  Pay no attention to formal inflation statistics.  Look back 20 years and you will see your basic expenses double in that time.  I don't work anymore and cannot get raises unless my income instruments raise their payouts.  The first graph below shows recent dividend increases by HD.



I call the yield of 2.15% puny because today you can buy an FDIC (federally insured) one month C.D. that pays 2.01%.  The only reason to take the risk on HD is the dividend increases. 

Look at this chart of HD's debt to equity ratio and you can see they borrowed a ton of money recently.  Clearly low interest rates make that borrowing look smart but what happens when they need to roll that debt.  Will they be stuck with higher interest rates?  Could those interest payments cut into the cash available to raise the dividend.




Certain industries do need to use a lot of debt to fund their operations, and this industry does carry quite a bit of debt. Look at the comparison of D/E ratio among HD's peers.  Lowe's debt to equity is 2.89.   This D/E ratio is still high but not as high as HD's. 

Will the debt impact HD's ability to pay the dividend and continue to increase the dividend?  In the next graph, cash flow is added and it appears that HD is capable of servicing this debt as cash flow has increased right along with the increased debt.




Something has to give and it is shareholder equity.  The third graph shows what happens to shareholder equity in view of this debt.



I own HD and have call options expiring in March and April.  I use the calls to boost the income from HD.  My basis is $148.92.  Should I have risked losing HD to the call buyer?  My strike prices are $185 and $190 respectively.  Most likely, I will lose my shares. 

My loss will be any opportunity from HD's stock price soaring even more.  This is called lost opportunity.  Perhaps this will happen but I don't suffer over spilled milk.   I am more worried about finding a stock where the dividend increases significantly and I can boost annual income by using calls.  

Should I initiate a new position?  Calls are good.  Take a look at this call available today. 

 


This call calculator illustrates that in fewer than 60 days, you could bag a quick 8.33%.  Or your call could expire and you have boosted  you income by the value of the call premium while you wait for your next dividend increase.


Only you can decide to buy now and sell a call or to buy and hold.  I am going to pass on this trade.  My reason is risk management.  I just need to keep income stocks with pristine balance sheets.   I can make many arguments that support HD management's decision to boost shareholder value through stock purchase buybacks funded with debt.  I prefer a stock that boosts shareholder value through more revenue, more earnings and more free cash flow without the risk of interest rate increases.

M* MoneyMadam

Disclosure:  Long HD with calls
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Monday, February 11, 2019

Nvidia very short term call for income

Nvidia, symbol NVDA is not exactly a dividend machine but it does pay a dividend.  Yet, in this trade today, the dividend is irrelevant as the call expiration is 4 days.  Nvidia's next expected ex-dividend date is later in February.  The point of this call is simply quick income.

I don't really want to own NVDA as a long term holding.  I am hoping to make a quick 2 percent of income in 4 days and bag a small capital gain should NVDA be called away.  If it is not called away I will sell it right away provided it is at or above my cost basis less the income from the call.  The adjusted cost basis in this case would be $146.09 less the income from the premium of $3.00 or $143.09. 

If it is above my cost basis, I will probably continue looking for short term calls until NVDA is called away.   I have done this before with NVDA.  This is not a conservative investor's trade.  It is controlled risk to boost income. 



Nvidia's Fundamentals:




NVDA has good enough fundamentals that I am not too worried about it going belly up.  However, it is extremely volatile and could sink to the 52 week low or go lower on some catalyst that I do not know about.

Short Term Call:

Call prices vary all day long.  You may not be able to get this trade tomorrow and I could not get this published before the market closed.  Yet, you may be able to do even better.  It all depends on the call buyers.





Pressure is being placed on corporations to not pay out dividends.  We income investors are already suffering from having no safe place to earn income and with dividend payouts pressured, covered calls become even more important.

If you have cash to put work, consider a trade like this.

M* MoneyMadam
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Wednesday, February 6, 2019

Western Digital is a laggard but call activity looks good

Western Digital is a chip maker that has suffered.  WDC sports a really good yield above 4%.  Balance sheet as measured by D/E (debt to equity) ratio is good; D/E = .97.  P/E is just a bit high at 17.4.

The call illustrated below captures the next expected dividend with the ex-div date about March 28, 2019.  I picked an expiration date of April 18, 2019 and a strike price that I think WDC will not meet.
Although WDC could easily be called away as the 52 week high is over $100.   If it is called away, I will book my profit with pleasure.





With this trade I add a solid income stock with call potential.  Beta is 1.17 (source Nasdaq) which provides for call selling opportunities.  

The negative feature is no dividend growth.  WDC has held the dividend steady for four years.  However, prior to 2015, dividends were increased regularly.  Revenue growth is quite good at 14.8% and payout ratio of dividends to free cash flow is only 20%.  I think it is a safe investment for conservative income investors.

M* MoneyMadam

Disclosure:  Long WDC with calls
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Skyworks Surges a few calls to consider

I own Skyworks, symbol SWKS, and I trade it by using covered calls because the dividend is a paltry 1.78% which is too low just to hold it.  

The call illustrated below is of interest to me.  It captures the quarterly dividend as the expiration date is after the ex-dividend date of 2/28/19.  When you add in the call premium, your income yield goes up to 2.25%.   If you are called away you get some capital gain. 





SWKS is on solid ground: no debt, a P/E ratio less than 15 and good revenue growth.  SWKS is volatile enough, beta is 1.28 (source Nasdaq) that you can sell calls several times during a year.

Now if you want to go out further with a higher strike price and bigger premium, consider the May, 17, 2019 expiration with a $95.00 strike price.





Several options (pardon the pun) for a conservative income investor.

M* MoneyMadam

Disclosure:  Long SWKS with calls
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