Back on 12JAN2015, the raptor recommended Diageo as a buy and hold investment. Today, we are going to revisit this pick and write covered calls. At the original time of the pick, I knew it was undervalued but wasn’t quite sure what the fully valued price might be. My preferred metric of price to free cash flow versus the industry multiple didn’t seem to apply because there had been so much recent merger and acquisition action in the sector. I have decided to do a comparison based on price to operating cash flow, same as with IBM.
At last quarterly report, DEO’s multiple was 15.6 while the industry was sporting 17.4. Thus, we want to apply an approximate 112% premium to acquisition price. That would be about 124.75 a share. We will thus write the 125 strike calls. The July 2015 expiry looks tasty.
Action to take: for every 100 shares of DEO you own, write one contract of DEO150717C00125000 for at least 2.55.
Since recommending DEO, it is appreciated to 119.42, a 6.7& gain in less than 2 months. We are doing very well on an annualized basis! Today, we are going to pick up an addition 2.55 on our cost basis of 111.85, an additional 2.28% over 141 days or 5.90% annualized. DEO is currently paying 2.60 a year in distributions so we are roughly doubling our cash yield for agreeing to potentially sell DEO at a full valuation. Delicious!
Devour your prey, raptors!