I’m starting a new series today. It will go on hiatus for an expiries update Friday, transparency on Monday, and follow up trades thereafter.
music selection: “24 Hours” — The Sounds
My first blue chip candidate for put writing is AbbVie Inc. (ABBV). This was formerly a part of Abbott but was spun off into an independent pharmaceutical business. They have three drugs that lead their class: Synthroid, Lupron, and Humira. In addition to strong current income, they have 20 drugs in Phase II and III of testing. The pipeline is full and cash flow should be strong for decades. It is also huge. The company has a market cap of 94 billion. And if you are assigned, the stock yields over 3% from dividend distributions. There have been 4 dividend raises in its short history since 2013. A company that rewards shareholders well.
There is good liquidity in the options market for ABBV and weeklies are available so you will almost always be able to sell a put at the 6 week sweet expiry sweet spot for accelerated time value decay. Raptors who sell the near the money strike ABBV160318P00057500 by splitting the current bid/ask spread can expect a price of 2.53. That trade would be in force for 52 days and yield an astounding 30.88%. Alternatively, go down a few strikes to maintain a minimum 12% return while picking up a lot of downside protection.
Next up is Automatic Data Processing, Inc. (ADP). This company is the undisputed King of Payroll handling the payroll processing for many other companies. They are well diversified with a customer base where no one customer makes up more than 2% of revenues. They can withstand losing a client. This company has a peculiar balance sheet. Because they are engaged in the business of transferring cash payments from customers to third parties, they maintain an enormous amount of liquidity and carry lots of cash. This could result in a nice kicker if interest rates rise as that would be a second material source of income for the company. The company has a 37 billion market cap and a low Beta reflecting the sleepy nature of this low risk business.
The near the money (80) strike is lucrative as well. Raptors who sell ADP160318P00080000 can expect to split the bid/ask at 2.53 a contract. The trade would be open 52 days and yields a tasty 22.20% annualized. Shares yield almost 3% . The company has a long history going back to 2000 of raising the dividend. The initial dividend in September 2000 was 8.75 cents a share, paid quarterly. The current dividend is 53 cents a quarter. That is over a 500% increase!
Today’s final gem is Colgate-Palmolive Co. (CL). This is a very defensive consumer good company with strong brand presence in many categories. The company was founded in 1806. The top product, Colgate toothpaste, is the #1 brand in a whopping 146 countries. This is a very global play with 80% of revenue generated outside the United States. The company has paid a dividend for 117 straight years.
Like ABBV, there is a great deal of liquidity in the options. The six week expiry nearest the money is CL160318P00062500. Splitting the bid/ask returns 1.41 a contract. The trade would be in force 52 days and yields a respectable 15.84% annualized. That is a great return against the low Beta this mega cap has.
Devour your prey raptors!