VZ: Can You Yield Me Now?

by Dan January 14, 2016 1:02 pm • Commentary• Trade Ideas

Last week (below) I made the case why Verizon (VZ), despite the wireless data pricing headwinds it faces, could be an attractive place to park some cash. The thought is based on the stock’s 5% dividend yield, domestic revenue exposure and the fact that wireless service has become like a consumer staple, making the stock somewhat defensive.  Regular readers know that it is my view that like last year (aside from a couple dozen growth stocks) equity returns will be hard to come by. U.S. investors who don’t want to be in cash, but who also do not want to be exposed to U.S. multinationals that rely on emerging markets for growth and face profit headwinds from the strength of the dollar overseas, may want to seek yield in sectors like U.S. utilities, U.S. Telcos and possibly big pharma (despite pharma’s dollar exposure).  In the last few months we have detailed bullish trades in the Utilities etf  (XLU here), and Pfizer (PFE here), and now want to enter our U.S. telco portion of this trade now that VZ has tested and held at the $44 support level identified last week.  

*Trade: VZ buy 100 shares for $44.60 and sell 1 Feb 46 call at 45 cents

Break-Even on Feb Expiration:

Profits: gains of stock between $44.60 and $46 of up to $1.40.  In the event the stock is above $46 on Feb expiration we have two options, first to have the stock called away at $46, but essentially at $46.60, up 5.3% in a little more than a month, or cover the short call and stay long the stock and look to roll.

Losses: below $44.60, but the 45 cents received for the call sale will serve as a 1% buffer to the downside.

Rationale:  While the stock does not pay a dividend between now and February expiration, if the stock goes sideways, and we were to take in the 45 cents for the call sale, then we will have effectively added what could look like an annualized yield of more than 10% on top of the expected 5% dividend yield.

See below for the original post:


Original Post Jan 7th, 2016: Trade Idea – $VZ: Yielding the Right of Way

On Monday’s Fast Money on CNBC you might have missed my Final Trade because my 10 year old daughter Ellie kind of stole the show:

Once you get through Ellie hamming it up you see that I touched on a theme that we have espoused for the better part of the last few months. For those looking for new U.S. equity exposure, consider sectors like Utilities, Telco and Big Pharma, all of which are deemed to be defensive given their high dividend yields, domestic revenue exposure (excluding pharma) which lessens the impact of dollar strength.

On a day like today Verizon (VZ), which was my final call on Monday, acts decently, down about 0.7% vs the S&P 500 (SPX) which is down about 2.2%.  Along the same lines, VZ’s 2% loss on the year is less than half of the SPX’s 4.6% decline.  

With VZ at $45.25 the dividend yield is about 5%, pretty fat.  If you were inclined to buy the stock here at $45.25 you might consider selling an upside call and size up that yield. For instance you could sell the April 48 call at 48 cents, a tad more than 1% of the stock price.  If you did that quarterly, it nearly matches the stock’s quarterly dividend of 56 cents (stock goes ex-div on April 6th) and create the potential for a super-yield of 9% annualized with the dividend and the call overwrite.

On Monday’s show my thought was that the stock could be bought a little above $46 using a $44 stop on the downside.  A look at the one year chart shows the near term support at the level, but also shows the massive gap on August 24th from $46 to $38:

[caption id="attachment_59978" align="aligncenter" width="600"]VZ 1yr chart from Bloomberg VZ 1yr chart from Bloomberg[/caption]

Given the current state of global markets, it makes sense to be careful about committing new capital to new equity longs until things calm down a bit overseas. At this point it makes sense to wait for a stock like VZ re-test key support, and hold and then look to to buy stock and sell call.

I would add one other point about this strategy, the dividend yield and the call sale offer some embedded protection to the downside, while the call sale limits potential upside. But the call sale will come at nicely inflated implied vol with the market weakness.

We will circle back on this idea if see a safer entry than today.