Sold Cash Secured Put + Investment Thesis – Starbux Corporation (SBUX) – $54.00 strike – Feb 16 Expiration

This trade was actually executed on Friday 02/02/18. 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.

This investment thesis is a little less involved than others. I put together my original thesis in June of 2016, and the qualitative stuff hasn’t really changed much. The main point of this refresher is to double check the quantitative statistics to make sure I still get a warm and fuzzy about the balance sheet and cash flow situation.

In case you missed it, I’m making it a point to twitter all my trades as they happen and this was no exception (sort of…I don’t always do it right away so fair warning I guess).

 I have updated the portfolio and income tracker pages to reflect this position.

Dividend Cycle

SBUX went ex-dividend earlier this week, so I won’t see a dividend from any of these shares. I already own 100 shares in the inherited IRA from a previous option assignment (way back in August of 2017). Also Mrs. Wizard owns 28 shares in her ROTH IRA. So we’ll still get paid this quarter…don’t you worry about that!

The dividend distribution remains at $0.30/share, which is where it’s been since November when management raised it 20% from $0.25/share. I’d expect two more $0.30 distributions before the next raise.

The company is a dividend challenger, boasting 8 consecutive years of dividend increases.

The premium from this contract is less than the quarterly distribution, but the trade is only in force for 14 days.

Investment

# contracts

Strike

Expiration

Total Premium

Days in Force

Annualized Return

Closing Price

Downside Protection

1

$54

2/16/18

$24.91

14

12.03%

$55.77

3.17%

The QC (Quantitative Case)

Payout Ratio – EPS, FCF

34.6%, 61.5%

10 Year Revenue CAGR

11.56%

10 Year EPS CAGR (5 Year EPS CAGR)

83.81% (23.78%)

5 Year ave P/E – Current P/E (ttm)

386.5 – 18 = +368.5

5 Year ave Yield – Current Yield  

1.4 – 1.9 = -0.5

5 year mean DGR (dividend growth rate)

23.9%

Debt/Market Cap

$4.92B / $78.17B (6.3%)

Total Cash

$3.77B

Return on Assets

15.0%

Return on Equity

75.83%

Profit Margin

19.28%

EBITDA/Revenue

$4.98B / $22.73B (21.9%)

Reverse DDM Fair Value DGR at Strike

7.78%

Assumed DGR (DDM valuation 10% disc.)

8% max by rule ($60)

DGR Margin of Safety

0.22%

Dividend Cushion Ratio (7.84% DGR)

1.365

Cash from Ops “cushion”

-15.16%

Capex “cushion”

+41.68%

DGR “cushion” (delta)

+10.66%

SPL (Strike Price Logic)

I’ve been wanting SBUX under $55 for a long time. So when $54 popped up within my premium range I was pretty excited. Probably could have gotten a higher premium or a deeper strike if I’d waited till Monday. Meh…so it goes. Thou can’t time the market so thou shalt not try to!

Also if you look at the one year chart, it seems to bounce a lot around the $54 line. The most dramatic was after July ‘17 earnings, but there’s a lot of other bounces too.

SBUX 1 year chart – courtesy Yahoo Finance

As long as the strike price is reasonable relative to the stock’s intrinsic value and I get my 12% annualized return on the premium I can find just about any technical justification. “It’s bouncy at $54” is maybe not as sophisticated as you’d like but oh well.

QWaF (Qualitative Warm and Fuzzy)

As I mentioned already, the main goal of this updated thesis was to check the quantitative stats. Qualitative thesis remains the same as before.

CPR (Cold and Prickly Risks)

Same same.

 

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