Quick Update - May Dividends

Yesterday was the final ex-dividend date for holdings in my Rescue My IRA account.  I've included a snippet of the little table I use to track dividend payments every month here on the left.

The PSX shares that were spun off out of COP are included at the value I sold them for...when all is summed, there was a total return of nearly $1,900 this month, or nearly 1.5% on my December statement value.  If the PSX is left out, the value of the dividends falls to around 0.3%, which would likely annualize out to between 2 and 4%, which is my goal in the account for income sourced out of dividends.

I had hoped that three of these holdings - GLW, NOC, and ADM, specifically - would be close to their strike price at the ex-dividend date, but that wasn't the case this month.  I would have some good capital gains to show for those, but it didn't turn out that way.

Still a couple of trading days left to May - we'll see how it goes in the market, but I think I'm going to quietly finish out the month without any more transactions.

If not, the next post will be the monthly wrap.  BTW - enjoy the new video at the top of the page.

Closing out COP

Earlier in the month I realized that the 100 share position in COP no longer fit in with my trading plan.  The company has been working on a strategy to spin off a portion of its assets and their action finally came to be with the issuance of 50 shares in PSX.  This was done as a dividend of 50 shares for every 100 share lot in the parent stock.  The problem was that my option contract on COP was now adjusted to be for 100 shares in COP and 50 in PSX. 

PSX is not currently a dividend payer and is unrated by S&P - two strikes against holding it in the Rescue My IRA account.  My normal strategy would have been to immediately divest the shares, but the option contract on COP was now adjusted to be for 100 shares in COP and 50 in PSX.  A second impact was the adjustment of the COP shares to reflect the spin-off. 

I’d held this lot of COP since November, and would have been content to maintain them for a while longer if they still met the requirements of the trading plan.  Instead, I divested the whole package at a slight loss.

Here’s the analysis:

COP

Original November 2011 investment: 100 shares, $6988, average share price $69.88

Option Premiums (total – 8 contracts):  -$62.31

Dividends Collected (includes 50 shares of PSX):  $1,558.96

Stock Loss (sale price of $53.13 per share, adjusted by value of PSX dividend):  -$1,683.80

Total:  -$187.15

Absolute return -2.68%

Annualized return (210 days) -4.65%

Lesson Learned:  I had a good ride with COP, especially considering the early call I had on the previous COP position last October.  I probably could have gotten the position into a break-even status by waiting another month, but I feel like I took the correct action on this position to comply with my trading plan.  There is the problem with the net negative income off of the option premiums – this is the result of chasing the strike price up the ladder – although breakeven on the shares was at 70, I held contracts for 72.50, 75, and 77.50 during the course of this position.  I think I’ve summarized the impact of closing current contracts to chase a higher strike in a past post, and that is where the small loss came from – I’ve already fine-tuned my behavior in this regard to ensure I am always getting a net credit – a positive result – on contract trades.  

New Position: URS

Once I made the decision to pull the trigger on the ACM sale, I knew I needed to get that money working again using my trading plan.  So as I looked for a new stock, my first thoughts were to look within the same industry to see if there were competitors who fit my model.  I found one in URS – and although I don’t know if I will stay with the position for very long (I’m questioning whether I want so much money in the professional services sector), at least for now it seems to be a viable position that will help me meet my goals after the dismal performance of ACM. 

While there is potential for a hat trick in my URS position, my first contract is for a May expiry, so the stock may be called away before its expected ex-dividend date.    

Here are the details:

URS

5/7/2012 Bought 400 shares at a total of $15,827.00, basis $39.57

5/7/2012 Sold 4 May 2012 40 at a total of $287.99

Net Profit:

1) Options Income:  = $287.99
2) Dividend Income: $0 (Early June ex-date, if I end up with a roll-out I will update the calculation)
3) Capital Appreciation if assigned at $40:  $155.82

Total Net Profit if Assigned at 40 in May:  $287.99 + $0 + $155.82 = $443.81
Absolute Return on Investment: ($443.81/$15,827.00) = 2.80%
Annualized Return if Assigned (20 days):  2.80%*(365/20) = 34.18%
On the date of the trade, URS’s price was out of the money (OTM).

Biting the Bullet on Legacy Holding ACM

At last, I decided to end the roller coaster ride I was on with my legacy ACM position.  This is the stock of a company I used to work for, and my view as an employee had been that the company was slow to react to changing market conditions – certainly worse at it than competitors JEC and URS are, and I had also been an employee at JEC before (and done very well with the stock through the employee stock purchase plan, I might add!).

So when earnings came out last week and the stock took a haircut, back to test the lows that we had seen with the shares last year just after I was put on furlough, I decided it really was time to see if there was a better use of the money.  After all, this is a legacy position that was not established under the Rescue My IRA trading plan – it wouldn’t make the cut to begin with as a non-dividend stock, and since it is a company I am not in love with, well, it was time for ACM to hit the road, Jack.

My basis in the shares was around $25, and I don’t see getting back to that this year and maybe not next.  So I cut my losses this week and sold at $18.50.  That capital gain hit is going to set the account back a few months, but I immediately established a position in URS, which I will post about tomorrow, and the recovery has already begun.

Here’s the position analysis:

ACM

Shares:

November 2012:  Transferred 880 shares in from my 401(k) during the rollover.  I sold 80 shares immediately so I would have 8 round lots.  My basis was about $25.00 per share.

5/8/2012 Sold 800 shares at $14,784.66, average share price $18.49

Total stock LOSS:  -$5,233.34

Options:

Over the course of this holding, I have had covered calls with March, June and September expirations at strike prices between 22.50 and 25.00; total options income:  $204.91

Dividend:

ACM is not a dividend payer.  It is a legacy holding that was not selected based on the trading plan, and has always been a candidate for divestment because of this.

Net Profit:
1) Stock loss:  -$5,233.34

2) Options income:  $201.91

3) Dividend Income: $0

Total Net loss upon divestment:  -$5,233.34 + $201.91 + $0.00 = -$5,028.43
Estimated Absolute Return on Investment: -25.14%
Annualized Return:  Not calculated

All I can say here is good riddance.  I have my work cut out for me to recover this loss over the course of the rest of the year.

And we'll call it a lesson learned - the trading plan for this account is working; the investments I make here need to follow that trading plan!

April 2012 Results

Just as with March, I spent a lot of April on the road, although not quite as much.  And then we finished the project we were working on, so I could get back to paying attention to the Rescue My IRA account. 

This month, I did achieve the goal of one percent return, taking advantage of a sideways market to roll-out the seven April positions, which generated quite a few call premiums.  There was an early call on my T shares, on their ex-dividend date – that capital gain helped offset the negative cash flow from the NVS position that was (thankfully) assigned later in the month.

There was another unpleasant surprise in the NVS position:  when the annual dividend was credited to the account, there was a foreign tax liability that accrued, reducing the return by another $87.  So we’ll chalk that ill-considered trade up to experience, and be happy that I only lost one percent on the entire trade.  More below in lessons learned.

Here are the statistics for the month:

Account Status:
Total Account Value, 4/30/2012 Statement:  $135,563.91
Total Cash Reserve, 3/31/2012 Statement:  $6,407.26
Core Stock Positions (as of 4/30/2012):  ACM (800 shares), ADM (300 shares), COP (100 shares), CSX (400 shares), GE (500 shares), GLW (700 shares), HAL (300 shares), ITW (200 shares), MSFT (300 shares), NOC (200 shares), SWK (100 shares), SPLS (500 shares), WAG (300 shares)

Performance Metrics:
Option Premiums Collected (net, month of April):  $1,722.26
Capital Gains Collected (net, month of April): -$94.96
Dividends Collected (recognized on the ex-date): -$86.87
Interest on Cash Reserve (estimated total): $0.18
Total, Absolute Return:  $$1,540.61
Absolute Return, Percentage Basis:  1.22%
Annualized Return, Percentage Basis:  14.70%

Next Month To-dos:
May will be an busy month for dividend-induced activities, since there are a total of eight positions that will see their ex-dates come and go.  A number of these have been trading at or near the break-even for an early call, so we’ll watch and see what happens: 

·         ADM on 5/14

·         MSFT on 5/15

·         COP on 5/16

·         WAG on 5/17

·         GE on 5/23

·         NOC on 5/23

·         CSX on 5/27

·         GLW on 5/29

If all of the dividends are collected, the amount will be $532, about 0.40% return, or half of the month’s goal.  As of 4/30, it looks like COP, CSX, GLW, and WAG face the possibility of early calls on their ex-dates.

There are three covered call contracts forecast to expire in May:     

·         CSX 22.5 (x4)

·         GLW 14 (x7)

·         NOC 62.5 (x2)

Consolidated Lessons Learned:

Be not hasty, continued:  I’ve posted about the NVS position a few times, but now that I am out of that position I can elaborate fully on it and the lessons I learned from a hasty trade that ended up being too good to be true.  NVS pays a handsome annual dividend that approaches 4%, in the weeks leading up to its ex-dividend date I decided to buy 100 shares in a dividend grab.  In keeping with the Rescue My IRA trading plan, I also sold a covered call on the position. 

When the ex-date came around, the shares dropped by the amount of the dividend – this always happens, but in this case, for some reason, I hadn’t figured the impact of this standard occurrence into my returns.  My response was to BTC the old covered call, and roll-out the position at the next lower strike.  That gave me some premiums to protect what would now be a strike at less than my purchase price.

I recalculated everything before making that trade, and found myself at pretty much break-even.  Becoming more and more disappointed with this trade, I also somewhat lost my patience, drumming my fingers every time I looked at its status and checked the calendar.  When could this be over with?  Not soon enough!

Finally, the date of the dividend payment came around.  The next day, I checked my account to see if the cash had come in, and it had…but there was also this foreign tax hit of around $87, which reduced the dividend percentage to around 2.5%. 

Worse yet, that subtracted from my returns calculation – putting me just below break-even.  I ended up losing about 1% on this one – somewhere around $60 off of my original purchase of the shares. 

As I mentioned, I will chalk this one up to experience.  I may make a move on an annual dividend payment like this one again sometime, but when I do, I will have a couple of additional checkpoints to evaluate before I pull the trigger!

May 2012 Dividend Forecast

I'm waiting for my April statement to be available on-line so I can post monthly results for the account.  Meanwhile, I've been taking a look at the month ahead, and since I remembered that February was a big month for dividend payments, thought I might put together a quarterly forecast, since many of the positions should be due for an ex-dividend date this month.  What I found is shown in the little graphic to the left.

Just as with February, it does appear that I can expect a good share of the earnings in May to derive from dividends - in fact, I can forecast over $500 in earnings, or a return of approximately 0.42%, nearly half my monthly goal, from dividends.

I noted that because I have a couple of positions that are either in-the-money or near-the-money, the likelihood of an early call is definitely there for some of the stocks.  If these calls are assigned, the returns reduce by more than $200 - not quite 50% of the expected payments.

On the other side of the coin, and early call means a stock gain. The contracts on these positions include calculated stock gains of between $260 and $540 per position.  If those contracts are exercised, I'll have a good May, indeed!