Sold Cash Secured Put + Investment Thesis – Fastenal Company (FAST) – $49.00 strike – Feb 16 Expiration

This trade was actually executed on Wednesday 01/17/18. 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.

You can see from the twitter that I also just bought some shares outright. That purchase was made in my ROTH IRA. Although the strike price for the option is lower than my purchase price, this investment thesis is obviously intended to cover both trades.

I have updated the portfolio and income tracker pages to reflect these new positions.

Dividend Cycle

FAST goes ex-dividend on January 30th, so the shares tied to the option contract won’t enjoy the payout, but the shares that I bought outright will definitely get paid. So that’s something.

This quarter’s dividend is $0.37/share which is a 15.63% increase from the previous quarterly payment of $0.32/share. Now that’s a dividend increase!

Although it’s exciting, the raise is not much of a surprise considering FAST is a dividend contender, boasting 18 consecutive years of dividend growth.

The premium on the put option is 1.5X the quarterly payout and is in force for only a month.

Investment

# contracts

Strike

Expiration

Total Premium

Days in Force

Annualized Return

Closing Price

Downside Protection

1

$49

02/16/18

$54.71

30

13.58%

$52.20

6.13%

The QC (Quantitative Case)

Payout Ratio – EPS, FCF

78.7%, 90.2%

10 Year Revenue CAGR

9.21%

10 Year EPS CAGR (5 Year EPS CAGR)

12.2%

5 Year ave P/E – Current P/E (ttm)

27.8 – 28.6 = -1.2

5 Year ave Yield – Current Yield  

2.3% – 2.4% = -0.1%*

10 year mean DGR (dividend growth rate)

19.3%

Debt/Market Cap

$415M / $15.45B (2.7%)

Total Cash

116.9M

Return on Assets

19.73%

Return on Equity

28.71%

Profit Margin

13.18%

EBITDA/Revenue

$1.01B / $4.39B (23.0%)

Reverse DDM Fair Value DGR at Strike

7%

Assumed DGR (DDM valuation 10% disc.)

7.5% ($59.20)

DGR Margin of Safety

0.5%

Dividend Cushion Ratio (7.25% DGR)

0.901

Cash from Ops “cushion”

+7.69%

Capex “cushion”

-39.82%

DGR “cushion” (delta)

-3.52%

*Historical vs current yield data taken from Morningstar. It would appear they haven’t updated the current yield to reflect the newly raised dividend. Forward yield is more like 2.8%

Yes there is some red up there, and it’s in the same categories as it was the last time I dug into these metrics, when I decided to hold off on pursuing FAST too aggressively, but you’ll notice that things are moving in the right direction. A little bit of FCF growth, and maybe a little less Capex, and the dividend cushion ratio pops back over 1.0.

It’s close is my point.

SPL (Strike Price Logic)

The $49 strike price represents a 3% yield with the newly raised dividend. 3% is a nice round number.

QWaF (Qualitative Warm and Fuzzy)

While the financial metrics may have changed since my original thesis in 2015, the qualitative stuff hasn’t.

The vending machine initiative is doing what it was intended to and the salespeople are selling.

The Fastenal quarterly earnings reports are a remarkably readable breath of fresh air in an otherwise insufferable wasteland of wall street jargon.

http://investor.fastenal.com/releasedetail.cfm?ReleaseID=1054478

CPR (Cold and Prickly Risks)

Same as before, although now the oil patch is looking a little brighter, so even better.

 

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