Woolworths trading back to $25.50 looks like reasonable value. We’re buyers on a dip in the share price at or $25.50. We see scope for 5% underlying EPS growth and when complimented with a covered call option, we’re generating 10%+ in annualized cash flow from the dividend and the call option income.
CCL is another name that we’ve been buying the stock at or near $10.00 and selling tight covered call options to generate 10 – 12% annualized cash flow .
We’ve been buying MPL and selling at-the-money covered call options to deliver an annualized cash flow of 10%+
There’s limited revenue growth, limited profit growth and a 4% dividend yield. However, we see the stock as a defensive income contributor to client portfolios.
In addition to the 10% cash flow from the dividend and option income, we’re allowing for a small capital gain over the next 4 months.
Domestic yield sensitive stocks are looking well supported as global yields in G7 economies retreat from recent highs. The bond market seems to be losing some of the optimism in the”reflation” trade.
Evidence of the retreat in yields can be seen in the US 10-YR treasuries where the yields are now trading down from 2.61% to 2.31%.
The impact of this is: money is now flowing back to REIT’s, infrastructure, consumer staples and telecommunication stocks.
We’ve been promoting the selling of resources and buying of defensive yield names, for the past few weeks. We continue to see defensive yield names complimented with tight covered call options as the best way to deliver 10-12% cash flow whilst protecting capital.
Chart – SCG
Shares of QBE are up over 5.5% in early trade as the insurance giant reported a 5% jump in net profit, as well as, a $1 billion share buyback scheme.
In the year up to December 31st, the company announced net profit after tax of $844 million, which is up from $807 million over the previous year. Return on equity also improved from 7.5% to 8.1%.
QBE declared it will pay a 33 cent dividend, compared to 30 cents last year.
QBE is fully valued and we recommend selling covered call options to enhance the investment return.
Our Algo Engine generated a short signal in AMP at or near the January high of $5.37. The stock is now trading down 10% at $4.83
A quick roll through the charts of the Dow Jones and the top 30 stocks that make up the index.
This is a great way to see the investment trends of some of the world’s largest companies.
We’ve sold $27 call options over BHP into April and quit all other metals exposure. Our preference for BHP over other resource names is based on our assumption that energy prices will remain supported in the near term.
Three factors will likely support energy prices short term: The Trump administration’s policy will likely be bullish for energy, OPEC and Saudi production cuts and the Saudi Aramco IPO early next year (biggest IPO in history). The IPO will be better received in a supportive energy environment.
For this reason we’ve kept BHP, and sold at the money call options to boost cash flow to 10 – 12%.
We’re not overweight the stock since we see risks building for the market, in general, and Iron Ore prices, specifically.
Chart – BHP
We’ve been cautious of the resource names rolling over from the recent highs and the potential negative impact on the overall XJO index. It appears that the broader Australian market may be in the early stages of a price correction.
Also, the Australian banks appear fully valued given the low revenue and profit growth outlook across the next 12 to 18 months.
Insurance Australia Group (IAG) reported a 4.3% drop in first-half profits to $446 million, which was down from $466 million from the previous corresponding period but slightly higher than the street’s expectations.
Amid an atmosphere of increased claim pressures, Australia’s largest insurer by market share announced its gross written premium grew by 4.7% to $5.8 billion.
IAG declared an interim, fully franked, dividend of 13 cents per share to be paid on March 30th. This dividend represents a cash payout ratio of 64.3 %.
Coca Cola delivered solid 2016 earnings result (+6.2%), which met market expectations. The announcement of a $350 million share buyback was a positive surprise.
Structural pressures from shrinking CSD consumption will need to be off-set by continued cost out programs, such as the announced closure of the SA bottling plant.
A positive trend remains the growth in Indonesia/PNG, which delivered double-digit earnings over the past 12 months.
Looking into 2017, we expect revenue of $5.2billion, EBITDA $980m, EPS $0.58 and DPS of $0.48 placing the stock on a forward yield of 4.8%.
We own CCL in client portfolios and we’ve been selling tight covered call options to boost the cash flow to 10 – 12%+ on an annualised basis.
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