03/04/13 Covered Call Pick: Comcast Corp (CMCSA)

Comcast Corp (CMCSA) is a cable, internet, phone, service and content provider that distributes their telecommunications services and media content around the world. For more detail, you can read our initial article on Comcast here.

Comcast has a market capitalization of $105.7 billion, with 2.64 billion outstanding shares.

Comcast recently announced a 20% increase to their dividend. They will be paying a quarterly dividend of $0.195 a share, for a current yield of 1.9%.

With a beta of 0.98, CMCSA currently trades with a volatility similar to the overall market.

We initially recommended CMCSA last May just a few months after our blog was getting started. If you didn't get a chance to catch it before, here is the resolution of that strategy, in which we had the stock called away for an If-Called Yield of 13.21%. At the time, we recommended not to buy CMCSA as the risk going into the end of the year was a lot higher with the fiscal cliff and poor economic conditions looming. So why are we deciding to recommend Comcast again at this time?

There is a lot to like about Comcast's stock at this moment. A 20% dividend increase is an impressive bump for the income investor, and while the yield is not high by any standards, the stock has had a strong long-term uptrend, with not much technical reason for it to halt its climb. The Up/Down ratio for the stock is 1.1, meaning investors are more willing to buy the stock on days when it is up, rather than sell the stock on days when it is down. Comcast's earnings estimates have also been recently upgraded for both 2013 and 2014, with 2013's EPS estimate at 23% growth over last year's EPS of 1.93. While the stock has a P/E of 21, this amounts to a PEG ratio (Price to Earnings-Growth Ratio) of less than 1, meaning the stock is cheap according to forward earnings. Lastly, over the past 12 months, the number of mutual funds that have invested in Comcast has increased by 13%, showing institutional support for the stock.

In terms of company itself, its largest move was its purchase of General Electric's interest in NBCU last month to become sole owner of the TV network NBC. While recent ratings showed the network plummeted to 5th place among the large networks, overall analyst belief of the purchase is positive, and ratings are expected to rise once again when the network's hit shows The Voice and Revolution return.

With all of this in our basket of positives, a good argument could be made to post a decent out-of-the-money Call and try to ride the wave of momentum and positive sentiment the stock has generated. But we are actually going to be recommending an extremely conservative strategy for CMCSA, with an at-the-money Call. Don't get us wrong, we think Comcast is a great investment, and the metrics we mentioned above all help support a continual rise in the stock. Yet the economic backdrop is still pretty abhorrent, and we have witnessed a lot of investors are looking for safety. Point of fact, the top two leading equity sectors year-to-date are Healthcare, and Consumer Defensive stocks - which does not show a large amount of optimism for the current rally. By selling an at-the-money Call we pocket a nice premium and create an investment that works similar to a bond, providing safety and income. In fact, the yield is actually higher than what you would receive from a CMCSA Corporate bond. That is why we are recommending buying CMCSA and selling the January 2014 $40 at-the-money Call.





Scenario:

  • Buy 100 shares of CMCSA @ $39.83 = $3,983 + Commission ($12.95) = $3,995.95
  • Write 1 CMCSA January 2014 $40 Call @ $295 - Commission ($8.70) = $286.30

Note: Prices may vary from the time of post. Actual commissions paid will vary returns. 


Static Return (Not Called):

(Call + Dividend)/Stock Price   X    (Days/Year)/Days to Expiration

(2.86 + (4*0.195))/39.96      X    (365)/319

10.42% Static Return


If-Called Return:

(Call + Dividend + Strike Price - Stock Price)/Stock Price       X        (Days/Year)/Days to Expiration

(2.86 + (4*0.195) + 40 - 39.96)/39.96       X      (365)/319

10.54% If-Called Return



Disclosure: Clients and/or principles of OakTree Investment Advisors may or will have an investment in the above positions, but only on the the same sides of the trades. The above numbers are analytic estimations based on information known at the time of this post. OakTree Investment Advisors does not guarantee the above, or any, result. All investment decisions should be made based upon individual’s personal investment goals and risk tolerance.

 

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