Tuesday, May 7, 2013

2 Buys and 2 Option Transactions

I've been missing from the blog world for most of the last 2 weeks due to our trip to Nashville and then once I got home my mom needed to be taken to the emergency room and was then admitted to the hospital.  My mom's since been released and is back home taking it easy.  So everything's back to normal.  Unfortunately I'll be heading back to work in the next few days which is a pain.  Despite having my mom in the hospital it was great to be off for just over 2 weeks.  I can't wait until I can reach financial independence and can then be home all the time, spending time with family and doing what I want to do.

Since I was absent from the blogosphere, I have one option announcement from last week as well as an option trade from today and 2 buys from today as well.  Now on to the moves.

Option 1:

The option transaction from last week was to close out the open put option on ExxonMobil.  I opened the position back in early April and received $156.71 in option premium.  I closed out the position last Friday for $0.51 which cost $58.98 after commission and fees.  This trade netted a profit of $97.73 which was a 1.12% return in just under one month, good for a 16.31% annualized return.  I was originally hoping to let this put go until expiration but decided to close it early to try and free up more capital in case there is a pullback.  I think there will be better values available in a pullback.  Of course right after I closed the position, XOM made a big move up in price thus lowering the price of the option.

My total option premium received in 2013 from closed or expired positions is now up to $657.52.

Option 2:

Yesterday I sold a $20 put option on Cisco (CSCO) that expires in June for $0.43.  This gave me $35.01 in option premium after commission and fees.  This option can work one of three ways.

(1)  If CSCO is trading above $20 on June 22, I'll get to keep the full option premium as profit.  This would be a 1.75% return over the length of the option which would be a 13.59% annualized return.

(2)  If CSCO is trading below $20 on June 22, I'll have to purchase 100 shares for $20 each.  However since I received the option premium I get to reduce my cost basis giving a value of $20 - $35.01 / 100 + $7.95 / 100 = $19.73.  Based on the current annual dividend of $0.68 per share my YOC would be 3.45%.

(3) If CSCO makes a quick move upwards, I can close out the position for a profit less than in case 1.

I like Cisco's prospects going forward and expect to see double digit dividend growth over the short term.  Considering that Cisco has $8.70 per share in cash my effective cost basis would be $11.03.  Using the 2-stage dividend discount model and a 10% discount rate, Cisco would only need to grow it's dividend by 3.75% for the next 10 years and 3.50% last year to justify an $11.03 price.  I think that will easily be surpassed.  And a 2-stage discounted cash flow analysis would require just growth with inflation to justify the $11.03 price.  I try not to focus too much on the cash on hand for a company, but when around 40% of the share price is represented by cash on hand, you are getting a good discount on the future growth.

They've been moving more into cloud computing which still offers ample room for growth and provide just about everything you need to set up a network.  Given how much our society is growing in it's need for information both cloud computing and Cisco's routers/switches...products will play an ever increasing role.  According to Internet World Stats, only 34% of the global population has access to the internet.  That's a huge amount that has yet to get online.

The reason I sold the June put, besides the combination of expiration return and execution cost basis, is that it will expire and give the 100 shares to my account in time for the next dividend payment which should go ex-dividend in early July.

Recent Buy 1:

I'll admit I'm not exactly sure about valuing the big banks, but I feel that the current price of Wells Fargo is still a solid value play given the growth prospects going forward as the economy continues to improve.  However I'm confident that Wells Fargo will be around for decades to come, and rewarding shareholders with higher dividends.  And as the underlying business solidifies, the dividend growth will continue at an accelerated rate as they have announced that their goal is to expand the payout ratio to pre-crisis levels, ~40-60%.  On a TTM basis, they're only at 29% so there's plenty of expansion to allow for fast dividend growth.  I picked up 40 shares yesterday for $37.86 each.  After commission my cost basis was $38.06.  These 40 shares will carry a YOC of 3.15% and will provide an extra $48 in annual dividends.

I've stupidly been avoiding adding to my Wells Fargo position because I didn't want to average up my cost basis.  I know, that wasn't very smart since I felt then that they represented a good value.  Live and learn.  This purchase brings my adjusted cost basis up to $34.56 which is a 42% increase.  Like I said, it was hard to average up the cost basis.  My original shares carried a YOC of 4.95% and now it's down to a still solid 3.47%.

Recent Buy 2:

My second purchase was British Petroleum (BP).  BP is still facing issues related to the oil spill but that should all be over with later this year.  This is the biggest risk with owning BP at this time because the lawsuits are still on-going and the potential settlement costs and fines have a wide range of dollar values.  Since slashing the dividend after the spill the board of directors has started to open up the coffers once again, rewarding shareholders with solid dividend growth.

I purchased 40 shares of BP as well for $43.90 each which was $44.10 after commission.  Based on the current annualized dividend of $2.16, these shares will carry a 4.90% YOC and will provide an extra $86.40 per year in dividends.  I plan to keep the BP position relatively small for the time being until the litigation issues are behind them.

My forward 12-month dividend for my FI portfolio now sit at $2,443.65 and are 69.8% of the way towards my goal of $3,500 by the end of 2013.  I'll receive the next dividend payment from both WFC and BP so this will help the dividend total out for this year.

I've updated my Portfolio and Option Summary pages to reflect these changes.

16 comments:

  1. I like the Wells Fargo purchase. I still like COP or CVX over BP. Having a small position is probably a good idea.

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    1. Zach,

      I like CVX a whole lot, but I wouldn't be interested in adding until it gets back to the $113ish level. I missed the last drop down and actually every drop I've missed on CVX because it's usually only there for a day or two and then climbs back up. BP will be staying at this level for now while things get settled but I think it's worth the risk to have some exposure to them.

      Thanks for stopping by!

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  2. Good stuff JC! I own 100 shares of CSCO and think they will be an awesome holding for the foreseeable future as our demands for their products will continue to grow.

    I actually just sold my BP holding last week and should have a post about it the end of this week. The reason I sold was the inability to DRIP the shares. Since the holding was small and in my IRA, I am not accumulating enough cash to justify not taking advantage of a DRIP. I used the proceeds to up my investment in KMI, maxing out my pipeline investments for now.

    I'd actually like to pick up some WFC but am holding out as I am potentially looking at some other demands for my capital right now.

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    1. W2R,

      I definitely like their prospects. Especially since about 40% of their market value is cash on hand so the growth of the company is essentially at a 40% discount. I'll take that. I want to own some shares outright and might sell another put option to try and get some shares. I don't think I'll keep a full 200 share position for the time being but would sell calls against the shares if both puts were executed.

      That's definitely a drawback to the places that don't allow free or partial share reinvestment. Especially when the cash isn't even enough to make other purchases so it just sits there earning the piddly interest rate if anything.

      If WFC pulls back again I'll be selling a put or picking up some more shares. I guess it'll depend on how deep the swing is.

      It was great to actually have some moves for the portfolio because despite having bookoos of capital I haven't really made too many purchases this year. I was hoping to make a lot more progress on my goals early in the year but hopefully the sell in May and go away will show up again this year.

      Thanks for stopping by!

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  3. Looks like you made some good buys JC. I'm interested in WFC and it's on my potential buy list next time I get some capital. I thought about it this month but went with Lorillard instead due to trying to pick up some higher yielders for my portfolio.

    I'm very interested in your option trades. I haven't done any option trading in my portfolio but it is an intriguing idea. I'm thinking of laying down some ground rules for myself and doing a little dabbling by selling some puts sometime in the future.

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    1. Dan,

      WFC is on my list for more future purchases and I have an open put option on them right now that should expire out of the money so that'll open up some more capital. LO is still great and I wouldn't be opposed to picking up some more so I recently sold another put option on them since the first put will expire this month unless LO takes about a 15% cut between now and a week from Friday.

      Definitely set some ground rules before getting started with options, especially if you're going the naked put route. I started off with just selling cash secured puts because it's much less to monitor. Once you have a good feel for them then getting margin added to your account and going naked puts is the logical next step. You just have to monitor the margin requirements and total outlay if all your puts were executed. I keep a larger cash position now than I would like but the markets have kind of forced my hand on that as well.

      My general rules are to earn a 10%+ annualized return if the option expires worthless or a cost basis if executed that I would be wanting to purchase anyways. Make sure to only use options, especially puts on companies you want to own, which is why I focus on the DG stocks. I tend to stay away from calls because typically I wanted to own the company at that price point so I want to keep owning them.

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  4. I've owned BP for a few years now and added to my position over the past month as well. The lawsuits from the oil spill are winding down, and the dividend is a great incentive to wait things out until the share price starts to rebound.

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    1. 1st Million,

      I wouldn't mind doubling my current position but I won't be getting too much exposure because the legal issues are still hanging around. I think this last lawsuit can range from like $5 bill to $30 bill. That's a big range. As you mentioned though, as long as the dividend remains in tact there's a great incentive to hang around for all the legal issues to finally be settled.

      Thanks for stopping by!

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  5. Both purchases look pretty good. I'm leery of financial stocks in general, but WFC is one that I would consider buying. BP should work out well, provided they can put everything related to the oil spill behind them and not let it drag on for several more years.

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    1. DGM,

      If I remember correctly this is the last of the lawsuits, although the cost has a huge range. I'll take my position now and wait for the legal issues to clear up and collect the solid dividend in the process. I think WFC is definitely one of the safer investments out of the big banks. I'm pretty annoyed with myself for not buying more earlier.

      Thanks for stopping by!

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  6. Nice buys. I'm in the process of building my cash back up after recent transactions and Wells Fargo is on my watch list

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    1. Gareth,

      I have the opposite problem, too much cash and not enough great investment ideas so it's been building. I've been scouting out more put option opportunities but there's very little that I'm seeing that is just a screaming buy, heck even moderate buys. Eventually we'll get another chance to have some great bargains.

      Thanks for stopping by!

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  7. Pursuit,

    Solid moves here. I like CSCO and it's currently on my watchlist.

    Great move on WFC. I think that's among the better opportunities in the market right now. Solid entry yield and I anticipate a very healthy dividend raise next spring.

    Best wishes!

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    1. DM,

      I'm either going to sell another put on CSCO or make a purchase. Although with my MSFT purchase earlier this week tech is starting to make up a larger portion of my portfolio. Still only around 5% of the invested amount so there's room to get a bit more exposure given the cash I have on hand.

      I'm hoping to add some more to WFC and will probably sell another put option on their shares. I currently have one expiring in July at the $37 strike price and I don't really foresee that one being executed. Of course Mr. Market could have other plans. I also expect another hefty raise next year as the business improves and they should get approval for further payout ratio expansion.

      Thanks for stopping by!

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  8. Some nice moves with Cisco and BP. I think Cisco will prove to be a good dividend payor over an extended period of time. I recently made an investment as well. They are a fairly stable business with high single digit revenue growth and I also expect that they should be able to pay out double digit dividend increases. BP was another that got some of my capital about 1 month or so. I also share the concerns around the legal liabilities, but I feel pretty confident that the dividend will be maintained and increased through this uncertainty. Typically, these types of lawsuits normally get settled so while $30B may seem large, that shouldn't be the end result.

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    1. Integrator,

      I think the combination of CSCO's relatively high starting yield and high growth rate they could be a great holding for the foreseeable future. High single digit revenue growth leads to low double digit EPS growth which means you can have low double digit DG with a flat payout ratio. I love that!

      I wanted a bit more exposure to O&G and while I think XOM is best of breed, the starting yield is just a bit too low for me. I really want to pick up some CVX, but not at anywhere close to current prices.

      BP's legal liabilities are potentially massive, but I'm pretty sure they've set aside at least half of the potential outlay if not more. And that's with an absolute worst case outcome. As you said these lawsuits tend to get settled so I would be very shocked to see it approach the $30 B mark.

      Thanks for stopping by!

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