DGI Adventure 06-22-16 Sold Cash Secured Put +Investment Thesis – AbbVie Inc. (ABBV) – $56.00 strike – July 08 Expiration

This trade was actually executed on Friday 06/17/16. 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

ABBV will go ex-dividend on 07/13/16 and the distribution will be $0.57/share which is what it’s been all year. I would wager that it’s unlikely they’ll raise it in October, but who knows. They’ll be due for an increase in January. The company only started paying a dividend in 2013, but they’ve been increasing the payout at a steady 10.6% rate ever since. They will achieve dividend challenger status with their next increase. This option will expire before the ex-dividend.

Investment

The QC (Quantitative Case)

SPL (Strike Price Logic)

At $56.00/share, the current dividend would represent a 4% yield. Simple as that really.

ABBV share price was having a shitty day on 6/17/16 and a decent premium was available with a relatively short duration at that strike price. I went for it.

QWaF (Qualitative Warm and Fuzzy)

Last year’s purchase of Pharmacyclics should eventually be a major driver for growth going forward. In the meantime, it’s blown the the dividend cushion metrics all out of whack. They took on debt to do the deal, and the cash flow growth isn’t really showing up in the TTM numbers yet. Otherwise the dividend cushion would make me a lot more nervous than I am.

Any time you try to come up with a warm and fuzzy about a pharmaceutical company, you can probably manufacture one from whatever is in the pipeline. Something is going to be in stage whatever trials and will have “shown promise” and is underappreciated by the market.

Humira is already chugging along making plenty of cash while the pipeline comes to fruition.

And the key with their pipeline is that the next big thing, Imbruvica, is not exactly a hail mary. It’s already been approved for several indications and is likely to get approved for more. It’s showing more than just promise, to the point where it’s not totally crazy that management bought Pharmacyclics for $21B.

CPR (Cold and Prickly Risks)

It is an awfully big dividend they have to cover for a company that’s only been paying one for 5 years. They have a lot of confidence in their growth going forward. The only way to realistically get the dividend cushion over 1.0 is to generate more cash.

Sure the yield is nice, but why so much so quickly? Is it really going to be sustainable? 

Don’t chase yield children. Don’t chase yield.

The corollary to the fact that’s it’s easy to manufacture a warm and fuzzy from the pipeline is that you can also easily manufacture doom, gloom and fear. 

There is probably no shortage of headline risk in buying big pharma during an election year with two populists whackadoodles running against each other.

Humira is a cash cow now, but has probably peaked. Their hepatitis stuff, Viekira Pak, faces headwinds (GILD is eating their liver for lunch) and is a great example of how one little regulatory filing can totally derail a pipeline darling full of promise. Now they’re betting on blood cancer. Some bets go wrong. That is a risk when you invest in pharmaceutical companies. I get it, I’m okay with it. I got really good downside protection with this trade, and the 4% yield is aggressive, but sustainable…for now anyway.

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