DGI Adventure 06-16-16 – Sold Cash Secured Put + Investment Thesis – Gorman-Rupp Co (GRC) – $25.00 strike – September 16 Expiration

This trade was actually executed on Monday 6/13/16. I didn’t get a chance to write about it until today.

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

Dividend Cycle

GRC’s current dividend distribution is $0.105/share. It will likely go ex-dividend sometime around 8/11/16 (ish). I would expect the distribution to remain at that level for one more quarter, but they are due for a raise in the fourth quarter. GRC is a dividend champion, having raised their dividends 43 consecutive years. This option will expire after the ex-dividend date, so if I get assigned I will miss out on the next distribution. The premium I received for selling this contract is the equivalent of 10 quarters’ worth of dividends, so I’m okay if I get assigned after the ex-dividend date.

Investment

On Monday 6/13, I sold one put contract on GRC shares for a net premium of $103.91 ($105 less a $1.09 trade commission). The strike price is $25.00 share, and the contract expires on September 16, which was 95 days from the date of the trade. That means the 4.16% absolute return works out to a 15.97% annualized return. The share price closed Monday afternoon at $27.50/share, which represented 9.1% of downside protection.

The QC (Quantitative Case)

SPL (Strike Price Logic)

There is not a lot of liquidity in GRC options. The put I sold was the only put contract traded that day: 

Option chain after market close on 6/13/16 – Courtesy Yahoo Finance 

$25.00 was actually the first out of the money strike available. It also represented near-term resistance back in March:

GRC 1 Year Chart – Courtesy Yahoo Finance

I might end up wishing I had waited until it got down in the $21 range where there was a major turnaround from the depths of the January abyss. That price range also represents a 2% yield (8% implied “fair value” DGR assuming a 10% discount rate). If assigned, it’s a relatively small position. I could always double down with another 100-share contract.

Kind of looks like I’m catching a falling knife doesn’t it?

QWaF (Qualitative Warm and Fuzzy)

GRC first popped up on my radar back in January, when I constructed my first watch list of 2016. To quote myself:

If you haven’t ever used a Rupp pump, you might not be able to fully appreciate this one. They make badass pumps. I had no idea they were publicly traded much less a dividend champion. This is very intriguing for me.

That was back when shares were trading for $23.61.

This is one of those “invest in what you know” kind of things I guess? Rupp pumps are really, really nice pumps. They make good shit, and have been doing it for a long time. Like I said, I didn’t realize they were a dividend champion, but I wasn’t surprised to find it out. They strike me as “that kind of company.” 12.9% of shares are owned by insiders. These guys are legit.

Also, according to the most recent quarterly earnings release (PDF), there’s this:

The Company is very proud to have been recognized for the fifth consecutive year as one of the 100 Most Trustworthy Companies in America by Forbes. To create this list, the year’s public filings for more than 2,500 publicly-traded nonfinancial American companies with market capitalizations of $250 million or more were reviewed and evaluated in depth to identify the 100 that most “consistently demonstrated transparent accounting practices and solid corporate governance.” Among the 47 small cap honorees, Gorman-Rupp was tied with three other companies for the highest annual rating, and was tied with one other company for the highest rating over the past four quarters.

How much more warm and fuzzy can you get than the 100 most trustworthy companies in America? This is the kind of pump company you want to marry your daughter.

CPR (Cold and Prickly Risks)

1. This is a pretty small company. No fortress. No moat. They’re extremely specialized, but it’s not like they’re the only pump company in the world. They just do really good work. It isn’t easy to maintain that kind of level of excellence.

2. A lot of their big dollar clients are having a tough time right now. The oil & gas / commodities market is a tough place to be at the moment, and people are probably trying to make the pumps they have last as long as possible rather than buy new ones.

This is one I’m giving substantial credit to history and brand. I realize past performance does not guarantee future results, but their balance sheet is impeccable, so even if things are a little rocky…I feel pretty good about getting paid a steadily increasing dividend for the foreseeable future.

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