Sold Cash Secured Put + Investment Thesis – DSW Inc. (DSW) – $20.00 strike – JUN 15 Expiration

This trade was actually executed on Monday 05/07/18. 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.

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

Dividend Cycle

DSW most recently went ex-dividend on March 22nd, and the distribution was paid on April 6th. The next ex-div date should be sometime in late June. Hopefully this contract will expire before that, so if I’m assigned the shares I can also receive the quarterly distribution. It will be close though.

As I pointed out in my April summary, this most recent quarterly payment of $0.25/share represented a 25% increase over the previous $0.20.

When I first became interested in DSW (way back in 2015) it had recently attained dividend challenger status with 5 consecutive years of dividend hikes. But then management froze the dividend for the next couple years, so it’s not on the CCC list any more.

The company’s growth story has slowed down a little bit, but I still think there’s room for dividend growth, and hopefully this recent increase is the start of a new streak.

The premium on this contract exceeds the quarterly distribution and is only in force slightly more than a month.

Investment

# contracts

Strike

Expiration

Total Premium

Days in Force

Annualized Return

Closing Price

Downside Protection

1

$20

06/15/18

$33.91

39

15.87%

$23.48

14.82%

The QC (Quantitative Case)

Payout Ratio – EPS, FCF

96.4%, 34.6%

10 Year Revenue CAGR

9.14%

10 Year EPS CAGR (5 Year EPS CAGR)

17.67% (-48.8%)

5 Year ave P/E – Current P/E (ttm)

-9.15

5 Year ave Yield – Current Yield  

+2.08%

5 year mean DGR (dividend growth rate)

20%

Debt/Market Cap

$0/$1.87B (0%)

Total Cash

$300.5M

Return on Assets

7.99%

Return on Equity

7.13%

Profit Margin

2.4%

EBITDA/Revenue

$261.9M/$2.8B (9.35%)

Reverse DDM Fair Value DGR at Strike

5.0%

Assumed DGR (DDM valuation 10% disc.)

6.0% ($25.00)

DGR Margin of Safety

1.0%

Dividend Cushion Ratio (5.74% DGR)

2.53

Cash from Ops “cushion”

-60.73%

Capex “cushion”

+196.6%

DGR “cushion” (delta)

+33%

SPL (Strike Price Logic)

With the newly increased dividend, the $20 strike price represents a 5% yield. I like that yield and it’s really about as simple as that. The company will report earnings on May 22, so the implied volatility is through the roof. Lots of premium value in addition to great downside protection.

QWaF (Qualitative Warm and Fuzzy)

Take a gander at my previous qualitative analysis. Honestly things haven’t changed that much. It’s all about the omnichannel and the loyalty problem.

Oh and insider ownership is to up 11.5% of outstanding share float.

Management uses the dividend to pay themselves. Combined with great cash flow and a healthy balance sheet, that makes for a no-brainer as far as I’m concerned.

CPR (Cold and Prickly Risks)

Specialty retailers like DSW are facing a new world order. People are shopping differently than they used to. Adapt or die.

Also when the economy eventually turns around, consumer discretionary spending is going to feel a pinch. DSW is projecting pretty muted growth over the next few years, and that’s in the currently frothy expansion. So that may not be super optimistic.

But show me a company with a wide cash flow buffer and a debt-free balance sheet, and I will show you a company who can navigate the toughest of economic climates.

With a 5% yield? Yes please.

 

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