Seagate Technology (STX) is one of the stocks that I am holding in my retirement account. I purchased it as part of my focus on dividends since it had a 4% yield at the time. The stock increased in price and I ended up selling it in late June for a 23% annualized profit. But I immediately repurchased it again and instituted my hedging strategy since I still fell like the stock had some decent potential for further gains.
Well this week, STX reported earnings. It seemed at first like investors were going to be disappointed as the stock had opened down over 5% from above $30 per share to the mid-$28 range. But gradually, the stock began to improve and closed right at $30 per share even though the broader market was down for the day.
Why the Strength?
Well in addition to reporting earnings and giving a somewhat disappointing outlook, Seagate announced that they were increasing their dividend from $0.25 per share to $0.32 per share! Assuming that the dividend remains at that level for the next year, the yield on the stock at $30 per share is just over 4.2%. I think that investors may have figured that out and realized that maybe it is worth the investment to get a decent return with the potential for some capital gains.
Now if you are like me, then you can have your dividends and hedge the stock also. Right now, I am sitting on protective puts at $25 and $27 per share with outstanding calls at $28 and $30. My basis for all the shares I own are $27.16. If STX remains above $30 per share for the next eleven trading days, then they will all be called away at an average of $29 giving me a $1.84 profit. Plus I will get the dividend since the ex-dividend day is August 10th.
It is possible that my $28 strike calls could get exercised before then if someone wants to try and capture the dividend. However, they would have to make sure that it is worth it when compared with the price paid for the option and the amount of capital required to exercise. Even so, I would still have a profit at that price.
I was encouraged to see that the dividend seemed to help stabilize the stock and provide a floor for the shares. Of course, it isn’t that surprising since a significant portion of historical stock market return can be attributed to dividends. It only makes sense that stocks of companies that return money to shareholders would be in demand and perform well over time.
It is impossible to know what kind of reaction an earnings report will get and such was the case yesterday with Seagate Technology (STX) when they reported earnings after the close of the market. It is still unclear exactly what will transpire as a result of this information since the market hasn’t opened today.
But regardless of what happens, I always want to be prepared and able to make adjustments whether the stock decides to go up, down, or sideways.
Seagate Gets My Attention
Seagate initially got my attention in November of last year as a stock that was paying a decent dividend of over 4%. I thought it would be an important component to my dividend plan for my retirement account. Ultimately, being able to manage a portfolio of dividend stocks will be some great knowledge to have so that I don’t have to deplete principal during retirement and can live off the generated income instead.
When I purchased STX, I was able to buy it for under $18 per share. Since then, I have more than doubled my position and sold calls and purchased puts so that my current basis for the entire position in STX is $23.41 as of this moment. Because the stock took a major hit earlier this month, I was concerned about the earnings report. So yesterday, I purchased the May $25 puts for $0.68 per share.
Because I also wanted to benefit from a possible positive reaction especially with the DOW over 13,000 again, I bought back the April $26 calls that I had sold leading to the current net basis. Now I still have many April $28 calls and May $28 calls outstanding so those April calls could easily get exercised this week if the strength continues. But I could still buy back the stock next week to get the $0.25 dividend.
The best thing about this entire series of transactions is that, no matter what, I have a guaranteed profit of $1.59 in May even if the stock drops to $10 per share. The protective puts assure me of that. It still works out to a return of $1.59/$23.41 = 6.79% for 6 months worth of time. Certainly not a bad return at all. Plus I have the previous dividends which I don’t count in the basis at all.
Should I end up selling all the shares at $28 in April and May, the return would jump to $4.59/$23.41 = 19.6%! It would actually be even better because I still have a few calls that I could sell between now and then to lower the basis a bit more.
But You Missed Out!
Now some of you might be thinking that I missed out on a big time gain if the stock went from sub-$18 to over $28. And you would be right. But how did I know in November that it would happen like this. I didn’t! And anybody who says otherwise is a liar!
Because I don’t know which way the market will go after purchasing a stock, I want to avoid big losses rather than hit home runs. I know that in the long run I will be better off.
Maybe someday I will explain how I purchased GME at $25.82, sold it at $24 and made over 4% annualized profit. But that’s a subject for another post or even an ebook.
In the meantime, I will be curious to see what happens with STX over the next several days and weeks.