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Here’s a conservative play that could provide substantial total returns without (in my view) undue risk.
Procter & Gamble [NYSE:PG] Feb. 13, 2009 close: $51.09
52-week range: $49.95 (Feb. 12, 2009) - $73.57 (Sep. 15, 2008)
Dividend = $0.40 quarterly = 3.13% current yield
Procter & Gamble is a world leader in products that would seem relatively immune from demand destruction in all but the worst economic conditions. They make detergents, soaps, toiletries, foods, paper products and industrial goods.
Revenues in FY 2009 (ends June 30, 2009) will likely come in at over $87 billion on sales of their major brands- Tide, Head and Shoulders, Pantene, Wella, Dawn, Always, Olay, Bounty, Charmin, Pampers, Gillette, Braun and others. Wal-Mart accounts for about 15% of sales.
With a worldwide market and necessity type products PG seems well suited to continue its long term trend of higher sales and earnings. EPS have grown in each year since at least as far back as 1992 and the dividend has been increased in each of those years as well. The current consensus estimate for FY 2009 is now standing at $3.75 /share (excluding a non-recurring gain on the sale of Folgers) – up from $3.50 in FY 2008.
These are high quality shares. Value Line rates PG’s financial strength as ‘A++’ and assigns them to the 100th percentile in both ‘stock price stability’ and ‘earnings predictability’ [with 100th being best]. They also garner Value Line’s top safety rating to go with a super low 0.55 Beta.
Here are the per share numbers as reported by Value Line.
(FY 2009 data includes estimates for Q3 & Q4):
FY ..….. Sales ….. C/F …... EPS ….. Div….... B/V …. Avg. P/E ... Avg. Yield
2002 … 15.47 …. 2.55 …. 1.80 …. 0.76 …. 4.64 …… 22.4x ....... 2.1%
2003 … 16.72 …. 2.82 …. 2.04 …. 0.82 …. 5.63 …… 21.6x ....... 1.9%
2004 … 20.21 …. 3.18 …. 2.32 …. 0.93 …. 6.19 …… 21.3x ....... 1.9%
2005 … 22.95 …. 3.51 …. 2.53 …. 1.03 …. 6.47 …… 21.5x ....... 1.9%
2006 … 21.46 …. 3.51 …. 2.92 …. 1.15 ….19.33 ….. 21.5x ....... 2.0%
2007 … 24.42 …. 4.25 …. 3.04 …. 1.28 ….20.87 ……20.5x ....... 2.1%
2008 … 27.53 …. 4.97 …. 3.50 …. 1.45 ….22.46 ……18.6x ....... 2.1%
2009 … 29.45 …. 4.98 …. 3.75 …. 1.55 ….23.10 ……16.5x ....... 2.4%
If the numbers aren’t enough to convince you that Procter & Gamble looks good, perhaps you’ll be swayed by the fact that Berkshire Hathaway owns about 3.55% of all outstanding shares.
At today’s quote of $51.09 Procter and Gamble shares trade at just 13.6x current FY estimates and < 12.5x FY 2010 expectations. That’s the lowest multiple on these shares in two decades. The current yield of 3.13% is even higher than buyers of PG shares received if they caught the exact low in the 2001 recession.
I’m looking for PG shares to return to at least 14 times the year ahead estimate of $4.11 for a target price of $57.54 or better by year end.
Here’s my play:
………………………….....................…….. Cash Outlay ….............…. Cash Inflow
Buy 100 shares @ $51.09 ……......…….… $5,109
Sell 1 Jan. 2010 $55 call @ $4.30 ………………………..................……. $430
Sell 1 Jan. 2010 $55 put @ $8.80 ………................…………………….. $880
Net Cash Out-of-Pocket …………………............………. $3,799
On expiration date (Jan. 15, 2010):
If Procter & Gamble shares are $55 or higher (+ 8% from today’s price):
Your $55 call will be exercised.
You will sell your shares for $5,500.
Your $55 put will expire worthless (a good thing for you as a seller).
You will have collected three $40 dividends or $120.
You will have no further option obligations.
You will have $5,620 for your original outlay of $3,799.
That’s a 47.9% best case total return (cash-on-cash) on shares that only needed to rise by 8% or more over the 11.25 months of this trade.
What’s the risk?
Should PG shares stay below $55 then you could be forced to buy an additional 100 shares of stock and to be liable for another $5,500 cash.
What’s your breakeven on this whole trade?
On the original 100 shares it’s the $51.09 purchase price less the
$4.30 /share call premium = $46.79 /share.
On the put you sold it’s the $55 strike price less the $8.80 /share
put premium = 46.20 /share.
Your break-even would be the average of those two prices = $46.50 /share.
As long as PG shares stay above $46.50 you’ll be in the black. A drop of up to 9% won’t hurt you while a gain of even 8% will bring almost a 48% total return in less than one year.
Nobody can guarantee that PG shares won’t be under $46.50 by January 2010. I can tell you, however, that PG hasn’t changed hands at that low a price since 2003 when EPS were $2.04 versus this year’s projected $3.75 and the dividend was $0.82 versus today’s $1.60 rate.
Disclosure: Author is long PG shares and short PG options.
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