This trade was actually executed on Thursday 03/09/17. I didn’t get a chance to write about it until today.
I’ve also sold a number of similar puts at varying strikes between $50 and $55. This is really just a continuation of that trade as market conditions for SBUX remain favorable.
SBUX went ex-dividend a little over a month ago, so I would anticipate the next date to be in early May, which means this contract will expire well before that. The current distribution is $0.25/share, which is where it’s been for the last two quarters. Management raised it from $0.20/share back in November of 2016, which is a whopping 25% increase. SBUX is a dividend challenger, boasting 7 consecutive years of raises.
The premium on this trade is over double the quarterly distribution, and is only in force for 29 days.
SPL (Strike Price Logic)
By rule, I won’t assume more than an 8% dividend growth rate for any stock. Ostensibly then any investment with less than a 2% yield is “overvalued” if I use a dividend discount model assuming a 10% discount rate. My investment thesis process does use a simple, single-stage DDM analysis to come up with a “fair value” based on that discount rate.
That makes stocks like SBUX kind of tricky. By this definition, “fair value” is $50/share, which is close, but still quite a bit below this strike price. I’ve always felt like $55 or less is a pretty good value for SBUX, and this fits that bill, although I need to look through different valuation lens to actually justify this strike price.
When I first took a position in Visa, which is another “low yielder”, I used free cash flow “yield” as an alternate way to look at valuation. SBUX cranked out about $2.04 of FCF per share for the trailing twelve months. That is a 3.8% FCF “yield” at this strike price. If we use the same simple, single-stage discount model on FCF instead of dividends, $54/share is a “fair” value so long as the company can grow FCF at a 6.2% rate, which seems pretty doable to me.
So there you go. Of course that is a pretty good illustration of the fact that valuation models are completely made up and you can contort the numbers to tell you whatever you want them to.