Sold Cash Secured Put + Investment Thesis – Intel Corporation (INTC) – $43.5 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

INTC went ex-dividend on 11/6/17, so we’ll have to wait until February before being eligible to collect the next payment. I would expect that distribution to continue to be $0.2725, which is where it’s been for the last three quarters. It will be interesting to see what kind of a raise shareholders get in 2018. INTC is a fallen dividend contender, having raised dividends for 10 consecutive years until 2014 when they left it flat compared to 2013. 2015, ‘16 and ‘17 have all seen increases, so they’re working their way back up the hill to renewed “challenger” status.

The premium received from this contract is 15% higher than the quarterly payout, and is only in force for 18 days, so that’s pretty sweet.

Investment

# contracts

Strike

Expiration

Total Premium

Days in Force

Annualized Return

Closing Price

Downside Protection

1

$43.50

12/15/17

$31.42

18

14.65%

$44.49

2.23%

The QC (Quantitative Case)

Payout Ratio – EPS, FCF

37.3%, 43.8%

10 Year Revenue CAGR

5.49%

10 Year EPS CAGR (5 Year EPS CAGR)

7.97% (-0.09%)

5 Year ave P/E – Current P/E (ttm)

13.4 – 15.7 = -2.3

5 Year ave Yield – Current Yield  

3.2 – 2.4% = +0.8%

10 year mean DGR (dividend growth rate)

14.2%

Debt/Market Cap

$31.99B/$208.3B (15.4%)

Total Cash

$25.93B

Return on Assets

9.12%

Return on Equity

19.56%

Profit Margin

20.60%

EBITDA/Revenue

$24.7B/$61.71 (40%)

Reverse DDM Fair Value DGR at Strike

7.49%

Assumed DGR (DDM valuation 10% disc.)

8% (max by rule) ($54.50)

DGR Margin of Safety

0.51%

Dividend Cushion Ratio (7.55% DGR)

1.246

Cash from Ops “cushion”

-6.60%

Capex “cushion”

+10.9%

DGR “cushion” (delta)

+7.45%

SPL (Strike Price Logic)

Not really much to talk about here. $43.50 was the lowest strike price that offered a 12% or better annualized premium.

INTC has been on my radar since I constructed my DOW Dividend Cushion Watchlist back in July. At that time it was much more fairly valued. The price has really rallied since then, and I wasn’t paying close enough attention.

Oh well.

QWaF (Qualitative Warm and Fuzzy)

In the future everything from your car to your deodorant is going to be connected to the internet, if it isn’t already. The chip-makers are going to make a boatload of money providing the hardware to make that possible.

We don’t own any chipmakers yet. I sold some QCOM puts earlier this year, and honestly the qualitative investment thesis isn’t that much different for INTC. The QCOM contracts never got assigned and I wasn’t really aggressive about it because of their legal issues.

Now that it looks ever more likely that QCOM will be bought out, they’re off the table as a long-term dividend play. AVGO and TXN have share prices that are a too high for a 100 share contract position right now, and MU and AMD don’t pay dividends.

So here we are. Hello INTC!

CPR (Cold and Prickly Risks)

This is a cut-throat industry. It costs billions of dollars in R&D to just keep up, much less stay ahead as an innovator. The manufacturing process is resource intensive and the single largest market for growth (China), doesn’t give a shit about intellectual property law making it easy for competitors to steal your ideas.

Fortunately the AVGO/QCOM merger represents consolidation which should ease competitive pressures for everybody. Also, even with China’s horrible patent policies, the barrier to entry is still high, and Intel is one of the most established names in the space.

Combined with a good balance sheet and healthy cash flow generation, I feel the dividend will safely continue to grow for years.

 

4 thoughts on “Sold Cash Secured Put + Investment Thesis – Intel Corporation (INTC) – $43.5 strike – DEC 15 Expiration

    1. Not sure I follow what you mean by this environment and why it would be better than others to own stock outright compared to a derivative position?

      Anyway, this position is in the money right now so I very well might end up owning the stock. That’s the whole beauty of cash-secured puts.

      Thanks for visiting and commenting!

    1. So it’d be better in a bear market? The strategy is independent of market conditions. My main concern is fair value of the underlying asset.

      The “risk” of letting a stock get away is the whole point of a cash secured put. In exchange for the unlimited upside of an outright long position, I lock in a 14%+ annualized return.

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