DGI Adventure – 06-03-16 – Sold Cash Secured Put + Investment Thesis – Microsoft Corporation (MSFT) – $50.50 Strike – June 24 Expiration


Please visit the core philosophies article on my investment thesis process for a deeper explanation of the components of this article.

Dividend Cycle

MSFT will go ex-dividend sometime in the middle of August. I would expect management to declare a $0.36/share distribution as they have for the past three quarters. In November, however, they will be due for an increase, because the company is a Dividend Contender, having raised its payouts for 14 consecutive years. This option will expire before the ex-dividend date.

Investment

Yesterday (06/02/16) I sold one cash secured put with a $50.50 strike price and an expiration of 06/24/16 for $0.39/share. On a 100 share contract, with $1.08 in trade commissions, that works out to a net premium of $37.92, which is an absolute gain of 0.75% on the $5,050.00 that is locked up to secure the contract. Since that money is only tied up for 22 days, that equates to a 12.45% annualized gain. MSFT closed yesterday at $52.48, so the strike price represents 3.77% of downside protection.

The QC (Quantitative Case)

A few comments:

1. $105.3B dollars in cash and cash equivalents! Let me spell that out: $105,300,000,000.00

2. I always use TTM earnings to calculate EPS, P/E etc. Something is goofy with MSFT’s earnings right now. So the valuation in terms of P/E and the EPS metrics are crummy. I care way less about earnings than I do about cash flow. And Microsoft’s cash flow is fucking fantastic. More accurately, their cash flow is pretty good…their cash hoard is ridiculous. They have so much cash saved up that their cash from operations could drop 93%…and stay there for the next 5 years…and they could still pay off ALL of their debt and increase the dividend at a 7.26% annual DGR! Wow.

SPL (Strike Price Logic)

Generally speaking, when you’re selling options you are dealing with three competing variables: premium yield, downside protection and duration. It’s kind of like the aphorism: “fast, perfect cheap…pick two.” I want to get at least a 12% annualized return when I sell put options, which was actually available with a relatively short duration contract (only 22 days), so long as I can live with a minimal amount of downside protection (~3.7%).

In this case, I think $50.50 is a pretty decent price, and I’d be happy to own shares at that cost basis. I’d really like to pick up MSFT at $48 or below because that would make the current distribution a 3% yield. If they end up raising the dividend at least ~5%, a $1.51+ dividend from a $50.50 cost basis will result in a 3% invested yield anyway. I like my odds here.

Plus look at the $50 level over the last 6 months or so:

MSFT One Year Chart – Courtesy Yahoo Finance

The next support level is at ~$47. It would be a bummer if it shot past my strike to that range, but I could live with it.

QWaF (Qualitative Warm and Fuzzy)

I recently got a new laptop at work and it came with Windows 10. I like it as well as Windows 7, which is what I had been using. Windows is great every other operating system. That is a fact of the universe. 

There’s a lot to be said for the move to mobile, as people do more computing on their phones and tablets, but if you want to work…you still need a real computer…and Microsoft owns your ass. My company uses gmail for their email server, which means we don’t really need Outlook anymore…in fact Outlook sucks compared to gmail’s chrome browser interface. But let me tell you…I.T. will have to pry Outlook from our users’ cold dead fingers. We’re paying an ungodly amount of money for a sync app to run on everyone’s machine so that they don’t have to give up the familiar Outlook interface. This is one “sticky”, “moaty” all-around beast of a company.

Also they are giving Amazon a run for their money in terms of cloud services, which everyone seems to agree is the future of big tech. The MSFT cash hoard, and existing moat gives them a great chance to keep pace with Bezos et. al in terms of capturing future cloud market share.

CPR (Cold and Prickly Risks)

My father-in-law refuses to get anything other than a Windows phone, and we give him no end of shit about it. Microsoft may dominate the OS market for computers, but certainly not mobile…and mobile is the future. PCs are so last decade (or two). As mentioned above, Amazon owns the cloud…Microsoft is playing second fiddle there too. What if everyone stops using PCs? If the Microsoft platform dominance deteriorates what’s left? X-box? Ha!

Tech is constantly changing, and companies can ill-afford to get complacent or stale. I’m willing to give Microsoft the benefit of the doubt; I can think of at least 105.3 billion reasons why.

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