Sold Cash Secured Put + Investment Thesis – Lazard Ltd. (LAZ) – $46.00 strike – DEC 15 Expiration

This trade was actually executed on Monday 11/27/17. 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

LAZ is a dividend contender having given shareholders 10 consecutive years of an increasing dividend payout. It recently went ex-div on 11/3/17 so there is lots of time to get a hold of some shares to enjoy the next distribution. I would expect that distribution to be $0.41 again, since that’s what it’s been since May of this year. In 2016 and 2017, LAZ also paid a special dividend of $1.20 in February. While you can’t count on special dividends, there’s no reason they couldn’t afford to do it again if management is so inclined.

The premium received for this contract represents 80% of the regular quarterly dividend payment, but the contract is only in force for 18 days.

Investment

# contracts

Strike

Expiration

Total Premium

Days in Force

Annualized Return

Closing Price

Downside Protection

1

$46

12/15/17

$32.91

18

14.51%

$47.65

3.46%

The QC (Quantitative Case)

Payout Ratio – EPS, FCF

45.0%, 22.2%

10 Year Revenue CAGR

2.16%

10 Year EPS CAGR (5 Year EPS CAGR)

0.466% (69.8%)

5 Year ave P/E – Current P/E (ttm)

28.2 – 13.5 = +15.3 (!)

5 Year ave Yield – Current Yield  

2.8% – 3.4% = -0.6%

10 year mean DGR (dividend growth rate)

15.3%

Debt/Market Cap

$1.37B/$6.18B (22.17%)

Total Cash

$992.71M

Return on Assets

10.53%

Return on Equity

37.73%

Profit Margin

17.74%

EBITDA/Revenue

N/A ?

Reverse DDM Fair Value DGR at Strike

6.43%

Assumed DGR (DDM valuation 10% disc.)

7% ($54.66)

DGR Margin of Safety

0.67%

Dividend Cushion Ratio (6.55% DGR)

2.119

Cash from Ops “cushion”

-46.94%

Capex “cushion”

+1431.25%

DGR “cushion” (delta)

+26.8%

Note: Their year-end 2017 numbers aren’t complete yet, so the 10yr CAGR statistics go back to 2007, which is pre-financial crisis. They’re just now getting back above where they were in terms of revenue and EPS. The TTM stats look great.

SPL (Strike Price Logic)

The options market for LAZ isn’t exactly thriving. I mean there’s a market, but it’s pretty thin. There aren’t a lot of different strike prices and only monthly expiries. This was basically the most downside protection I could get and keep my annualized premium rate above 12% annualized.

It also happens to represent nearly a 3.6% yield, which is pretty nice.

I could probably throw some bones around or read tea leaves in the technical chart and come up with an imaginary support level at $46 as well, but I’m not feeling very technical today. Sorry.

QWaF (Qualitative Warm and Fuzzy)

LAZ is an interesting, kind of niche play in financials. They’re an advisory firm and an asset manager. Now a lot of asset managers have, in my opinion, a somewhat shaky future as most heretofore unsophisticated investors are a lot more savvy about keeping expense ratios low, and the efficient market hypothesis pushes more and more assets into indexed products, which makes fancy asset managers and their high expense ratios kind of useless.

While LAZ is certainly not immune to this trend, their bread and butter comes from the “advisory” side. These advisory services for financing deals, underwriting IPOs, mergers and acquisitions, etc. are not going to be outsourced to robots any time soon. LAZ’s position in the industry and their business networks that have been built up over time provide a pretty decent moat. As long as there are deals to be done on Wall St, LAZ should expect to get more than its share of the commission checks.

CPR (Cold and Prickly Risks)

Although the advisory services are the really lucrative part of the business, half their revenue still comes from asset management. They’re kind of a boutique investment bank so they’re a little insulated from the robot trend, but they still need to adapt to a changing environment in the asset management space. Everybody does.

Also, it is a really great time in terms of how many deals per year are going on right now…that’s because times are good…valuations are soaring. There is a lot of money sloshing around Wall Street, which means it’s easier to scrape a commission off the top. When (not if) the next bear market hits, times will get tight, and LAZ will probably stop paying $1.20 special dividends in February.

But the balance sheet is still extremely healthy. And as long as they keep it that way, I see no reason why the regular dividend won’t keep growing regardless.

 

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