Sold Cash Secured Put + Investment Thesis – Tiffany & Company (TIF) – $92.00 strike – Jan 19 Expiration

This trade was actually executed on Monday 12/18/17. 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

TIF went ex-div the day after this trade was executed, so I will miss out on this quarter’s dividend distribution, which is currently $0.50/share. I would expect the March distribution to also be $0.50, and after that I would expect an increase.

TIF is a dividend contender boasting 15 consecutive years dividend increases. The premium collected from this contract is more than double the quarterly dividend payment, and is only in force for a month.

Investment

# contracts

Strike

Expiration

Total Premium

Days in Force

Annualized Return

Closing Price

Downside Protection

1

$92

01/19/18

$104.20

32

12.92%

$100.61

8.56%

The QC (Quantitative Case)

Payout Ratio – EPS, FCF

51.1%, 46.2%

10 Year Revenue CAGR

3.6%

10 Year EPS CAGR (5 Year EPS CAGR)

5.2% (1.54%)

5 Year ave P/E – Current P/E (ttm)

28.6 – 27.2 = +1.4

5 Year ave Yield – Current Yield  

1.9% – 1.9% = 0

10 year mean DGR (dividend growth rate)

16.8%

Debt/Market Cap

$1.07B/$12.5B (8.56%)

Total Cash

$1.01B

Return on Assets

9.2%

Return on Equity

15.29%

Profit Margin

11.46%

EBITDA/Revenue

$973.6M/$4.06 (23.98%)

Reverse DDM Fair Value DGR at Strike

7.83%

Assumed DGR (DDM valuation 10% disc.)

8% – max by rule ($100.00)

DGR Margin of Safety

0.17%

Dividend Cushion Ratio (8.01% DGR)

1.355

Cash from Ops “cushion”

-14.58%

Capex “cushion”

+33.77%

DGR “cushion” (delta)

+10.49%

SPL (Strike Price Logic)

Assuming TIF is due for a correction in the next month (who knows if this is true or not, but let’s pretend) where might it find support?

TIF One Year Chart – Courtesy Yahoo Finance

The 200 day MA is right at $92.45. This would be just above my strike price.

The Bollinger Bands around the 20 day MA ($95.64) are $100.31 and $90.97. The lower bound would be just below my strike price

Looking at the most recent rally up from November 8th the share price climbed from $90.87 to $101.34. 100% retracement would provide a similar resistance level as the bottom bollinger.

So if the price shit-tanks on me, there is some technical bologna that suggests it might bounce around $91 – $92 per share.

Interestingly this also coincides with the max downside on the option chain where I could still earn a 12% annualized return from the premiums received.

Fancy that!

QWaF (Qualitative Warm and Fuzzy)

TBH, I’m pretty bullish on wealth inequality right now.

The GOP just passed a boondoggle of a “tax reform” that overwhelmingly benefits wealthy people and corporations (the shares of which are owned mostly by wealthy people).

Central banks around the world are fueling this gonzo bubble of everything through unprecedented loosey goosey fiscal policy.

And the result is that the rich have been getting an awful lot richer lately. Like more so than usual.

In other words, now is a very good time for rich people, and rich people buy shit at Tiffany’s.

CPR (Cold and Prickly Risks)

The music is eventually going to stop. I don’t know when, and I don’t know how, but at some point the recovery is going to end, the stock market is going to crash, and companies that sell luxury goods are not going to do as well as they’re doing right now.

It’s an age-old cycle, and it’s certainly possible that the next time through is going to be so bad it blows TIF up.

Or management, who hasn’t been profligate or irresponsible with debt, will tighten the proverbial belt and manage their cash flow so that shareholders will continue to earn a growing dividend.

I’m betting on the latter.

 

Leave a Reply