Walgreens Boots Alliance (WBA) is becoming a darling of value investors given that its dividend yield is 6.4% and its P/E multiple is 6.7x. Moreover, out-of-the-money puts can be shorted for extra income. On top of that enterprising investors can short out-of-the-money put options to create extra income and have a potential lower buy-in.
The fundamentals are that the dividend is $1.92 per annum but earnings are forecast to be $4.50 per share this year ending Aug. 2023 and $4.79 for next year. In other words, the dividend is only 42.7%, less than half of projected earnings.
Moreover, the pharmacy retailer has raised its dividend every year for the past 30 years. Also, it is due to increase the quarterly dividend in its next earnings announcement at the end of July.
And since the P/E is so low at today's price of $29.92 in early trading on Friday, May 26, the value investor is getting a bargain. Nevertheless, WBA stock has been declining on fears of a recession. It is down over 30% in the past year.
This makes it attractive to investors who look to find a lower buy-in along with an income feature. That suggests that selling short out-of-the-money put options can be attractive to value buyers.
Shorting OTM Puts in WBA Stock
For example, the June 16 option chain shows that the $28.00 strike price puts trade for 29 cents. That produces an approximate 1.0% yield to the investor (i.e., $0.29/$28.00 = 1.035%). Moreover, the $28 strike price is 6.4% below today's spot price of $29.92. That gives the investor some leeway in case WBA stock falls further on or before June 16, which is just 21 days from now.
This means that an investor who secures $28,000 in cash and/or margin with their brokerage firm can then enter in an order to “Sell to Open” 1 put option at the $28.00 strike price. Their account will immediately receive $29.00. That $29.00 per put option shorted is over 1.03% of the investment made of $28,000.
Moreover, if this can be done for 12 months, the annualized return will be 12.4%.
And even if WBA stock does fall to $28.00 or lower on or before June 16, the investor gets a bargain. For example, the forced purchase at $28.00 per share would give the investor a dividend yield of 6.857% (i.e., $1.92/$28.00).
In addition, if the investor wants to be more conservative, they could short the $27.50 strike price put. Those puts trade for 21 cents and still yield 0.76% (i.e., $0.21/$27.50).
But at least there is more out-of-the-money space away from the spot price. WBA would have to fall by $2.42 in three weeks or less (i.e., $29.92-27.50=$2.42), or 8.0%.
The bottom line is that investors in WBA stock have an attractive yield, low P/E, and a secure dividend. They also have alternative ways to create extra income at a potentially lower buy-in price by shorting out-of-the-money put options in near-term expiration periods.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
