DGI Adventure 11-20-16 Sold Cash Secured Put + Investment Thesis (Revisited) – Microsoft Corporation (MSFT) – $55.00 strike – Dec 16 Expiration

This trade was actually executed on Monday 11/14/16. 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.

I already went through the thesis exercise when I first opened a position back in June, but I wanted to recheck the quantitative case factoring in the $26B purchase of LNKD.

I have updated the portfolio and income tracker back at the mothership to reflect this position.

Dividend Cycle

MSFT went ex-dividend the day after I executed this trade, so obviously I missed out on this quarter’s payout. Microsoft is a dividend contender, sporting 15 consecutive years of increases. This quarterly payout at $0.39/share represented an 8.33% increase over the previous distribution. I expect they’ll hold at this level for another three quarters before the next raise.

Although I missed this quarter’s payout, the option premium received exceeds the quarterly payout by 65% and obviously has much less duration.

Investment

The QC (Quantitative Case)

*Note: I’m pretty sure the current total cash of $136B does not reflect the LNKD expenditure. So I used $110B when calculating the Dividend Cushion Ratio.

SPL (Strike Price Logic)

$55 was as low as I could go and still get over a 12% annualized return on my options premium. It also represents an important valuation boundary for me.

I kept my projected dividend growth rate (DGR) at 7.65%. To meet my standard 0.5% assumed DGR margin of safety, I need a 7.15% implied DGR, or a 2.85% yield. After the increase, that represents a share price of $54.74, which is close enough, but I’d prefer not to go a lot higher if I can help it. Especially since the earnings are weird right now (note high P/E and payout ratio).

QWaF (Qualitative Warm and Fuzzy)

The qualitative case hasn’t really changed that much since the original investment thesis published in June. Although they have since announced buying LNKD for $26B. Some people might consider that a good thing.

CPR (Cold and Prickly Risks)

The qualitative case hasn’t really changed that much since the original investment thesis published in June. Although they have since announced buying LNKD for $26B. Some people might consider that a bad thing.

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