Sold Cash Secured Put + Investment Thesis – Walgreens Boots Alliance, Inc. (WBA) – $68.50 strike – JAN 26 Expiration

This trade was actually executed on Thursday 12/28/17. 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

WBA went ex-dividend in early November, so we’re looking at February for the next opportunity to be eligible for the distribution…probably a couple weeks after this contract expires come to think of it.

The current quarterly payment is $0.40/share, and will likely remain there for at least the next two quarters. I would definitely expect a raise after that though. That’s because WBA is a dividend champion, having rewarded shareholders with 42 consecutive years of dividend increases!

The premium earned for selling this contract is 1.75X the quarterly dividend and the trade is in force for just under a month.


# contracts

Strike Expiration Total Premium Days in Force Annualized Return Closing Price Downside Protection
1 $68.50 01/26/18 $69.20 29 12.71% $72.94


The QC (Quantitative Case)

Payout Ratio – EPS, FCF 40.3%, 25.2%
10 Year Revenue CAGR 10.02%
10 Year EPS CAGR (5 Year EPS CAGR) 7.42% (8.31%)
5 Year ave P/E – Current P/E (ttm) 23.8 – 19.2 = +4.6
5 Year ave Yield – Current Yield   1.9% – 2.1% = -.02%
10 year mean DGR (dividend growth rate) 16.2%
Debt/Market Cap $12.94B/$71.92B (18.0%)
Total Cash $3.3B
Return on Assets 5.65%
Return on Equity 14.01%
Profit Margin 3.45%
EBITDA/Revenue $7.68B/$118.21 (6.5%)
Reverse DDM Fair Value DGR at Strike 7.66%
Assumed DGR (DDM valuation 10% disc.) 8% – max by rule ($80)
DGR Margin of Safety 0.34%
Dividend Cushion Ratio (7.80% DGR) 1.83
Cash from Ops “cushion” -24.84%
Capex “cushion” +133.16%
DGR “cushion” (delta) +21.45%

SPL (Strike Price Logic)

It’s not every day that you can get this sort of volatility premium for a dividend champion like WBA. The implied volatility was quite high last week in anticipation of earnings coming out this morning.

Per usual the $68.50 strike was the most downside protection I could get and still enjoy a 12% or better annualized return on the premium.

From a technical perspective, there’s a lot of support between $69 and $70 per share, and this strike price is just under that.

QWaF (Qualitative Warm and Fuzzy)

Do you remember back in November when I wrote up my investment thesis for CVS?

Well it’s pretty much the same thing for WBA. In fact I’m not going to pursue a position in CVS anymore, but I’d still like exposure to the sector/industry. So hello, WBA.

I’m abandoning CVS because I’m not a fan of the debt that’s involved in in the Aetna deal:

CPR (Cold and Prickly Risks)

Much like the “warm and fuzzy” for Walgreens is basically the same as CVS, so are the risks. But Walgreens isn’t mortgaging the farm for some crazy “revolutionize health care” acquisition.

So I’m going with Walgreens now. The yield’s a little lower, but the dividend actually has a chance to grow, so there’s that.

What do you think? Should I have stuck it out with CVS for the extra half a point in yield? Let’s hear some comments!


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