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.
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.
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.