Sold Cash Secured Put + Investment Thesis – The Walt Disney Company (DIS) – $102.00 strike – AUG 18 Expiration

This trade was actually executed on Monday 08/07/17. 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. Additionally you might find my rules for trading options helpful in understanding the parameters of the trade.

In case you missed it, I’m making it a point to twitter all my trades as they happen and this was no exception.

 I have updated the portfolio and income tracker pages to reflect this position.

Dividend Cycle

DIS recently went ex-div last month with a distribution of $0.78/share. It should go ex-dividend again in December, and I would expect a healthy increase. Since switching to a semi-annual payment structure in 2015, the company has made a habit of announcing raises in December. Disney started paying a dividend in 2012 and has raised the annual distribution every year since, which is good for dividend challenger status.

This contract will expire well before the ex-div date, and the premium represents about 84% of the semi-annual distribution amount, while the trade is only in effect for 11 days.

Investment

# contracts

Strike

Expiration

Total Premium

Days in Force

Annualized Return

Closing Price

Downside Protection

1

$102

8/18/17

$65.20

11

21.21%

$106.35

4.09%

The QC (Quantitative Case)

Payout Ratio – EPS, FCF

27.6%, 28.8%

10 Year Revenue CAGR

5.67%

10 Year EPS CAGR (5 Year EPS CAGR)

15.47%

5 Year ave P/E – Current P/E (ttm)

+2.4

5 Year ave Yield – Current Yield  

-0.27%

5 year mean DGR (dividend growth rate)

21.6%

Debt/Market Cap

$22.19B/$158.7B (13.9%)

Total Cash

$4.34B

Return on Assets

9.57%

Return on Equity

19.94%

Profit Margin

16.22%

EBITDA/Revenue

$16.82B/$55.5B (30.3%)

Reverse DDM Fair Value DGR at Strike

8.47%

Assumed DGR (DDM valuation 10% disc.)

8% by rule ($78.00)

DGR Margin of Safety

-0.47%

Dividend Cushion Ratio (8.46% DGR)

1.37

Cash from Ops “cushion”

-8.69%

Capex “cushion”

+22.36%

DGR “cushion” (delta)

+11%

SPL (Strike Price Logic)

This contract was sold the day before DIS was going to report earnings, so implied volatility was well above historical averages. There were lower strikes available that still would have offered the minimum 12% annualized return I look for from premiums, but the overall dollar amounts weren’t very appealing. There is something psychologically unsettling about putting $10,000 or more “at risk” and only getting thirty bucks in premiums. So I took only 4% of downside protection to get a bit meatier of a payout.

With the benefit of hindsight and less than a week remaining on the contract it seems like it was a pretty good strike level. The price touched an intraday low on 8/11 of $101, and has been kind of hovering just in the money.

QWaF (Qualitative Warm and Fuzzy)

Cable is dying. We cut the cord a little over 2 years ago, and haven’t missed it a bit. I believe the future of TV lies with those who produce the content, and Disney is a content titan.

The format for watching TV is turning to more of an a la carte model rather than the traditionally all-you-can-eat cable buffet. You got your movies, you’ve got your sports (ESPN), you’ve got your hit TV shows and your niche content, etc.

If you produce content that lots of people want to watch, you can sell the content yourself or your own advertising. Screw the cable company.

CPR (Cold and Prickly Risks)

The main concern (I think) is that as the world of TV changes, Disney isn’t going to adapt as well as it needs to. This quarter DIS announced they were pulling their content from Netlfix and would start their own streaming service. There are lots of different opinions about whether or not this is good or bad, but in combination with a revenue “miss” Mr. Market punished the stock price.

The bears would probably say that this is all “too little too late” and that Amazon and Netflix have the advantage of first movers and Disney is just along for the ride…mimicking rather than innovating.

Also much has been made of declining ESPN viewership due to the cord cutting trend. Those concerns stem from a very simplistic view of the OLD model…namely if people cut the cord then they won’t watch ESPN anymore.

Like I said, we cut the cord a long time ago, and I still watch ESPN all the time…there’s an app for that and they get ALL the advertising revenue as opposed to having to share it with the cable company. Plus, they have your IP address and probably your search history and God only knows what else. I’d expect they should be able to develop some very powerful algorithms to get maximum advertising dollar out of their content, which is extensive.

I’m in!

2 thoughts on “Sold Cash Secured Put + Investment Thesis – The Walt Disney Company (DIS) – $102.00 strike – AUG 18 Expiration

  1. I really like DIS as a company but I don’t own any. Dividends are kind of infrequent and inconsistent with a lower yield. But they kind of have their hand in everything too, so are very profitable with good growth. How do you think their new streaming service they are planning will effect things?

    1. I don’t mind a low yield so long as I can expect it to grow rapidly, and I think DIS fits the bill for that.

      The current DIS/NFLX beef is interesting, and far from over. They have an awful lot of content…they’re probably one of the few with the firepower to even try something like this.

      The ESPN brand is a great asset as well. It sounds like it will remain separate from the movies and TV shows, but it’s important since live sports still hold the strongest advertising potential.

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