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Saturday, October 13, 2007

Special Situation: Capturing McDonald's Dividend

McDonald's is one of only a few domestic companies that pays an annual (not quarterly) dividend. A dividend of $1.50 per share goes ex-dividend on November 13, 2007.

The Covered Calls Advisor recommends considering taking a position in the nearest out-of-the-money (OTM) covered call for Nov'07. The stock closed Friday at $57.02 with the Nov 57.5 at $1.30 bid. At these prices, some key stats on a covered call position would be:
Annualized Return if Stock Price Unchanged (ARIU) = 54.3%
Annualized Return if Exercised (ARIE) =63.6%
Downside Breakeven Protection = 2.3% Note: Not great, but at .07% per day (2.3%/33 days) it exceeds this advisor's minimum threshold of .06% per day.
Overall, excellent return potential for a relatively low volatility stock.

Are you concerned about having the stock called away if the stock price is above $57.50 on or before Nov 12th if the holder of the option decides to exercise early to obtain the stock and capture the dividend?
Don't be! In that instance, we have still benefited from the capital appreciation and will have achieved a 40.7% annualized return.

You might want to wait until after McDonald's officially releases their 3rd quarter earnings this Friday, 10/19/07, although they just released preliminary earnings per share of $.83 which was $.05 above consensus estimates and revenue also exceeded expectations -- the stock reacted favorably to this news on Friday. If you decide to wait until after earnings release to take a position, the stock may have risen above the $57.50 strike price. That's OK -- in that case simply evaluate the possibility of selling the $60 strike price instead.

The Covered Calls Advisor Portfolio has not yet taken a position in McDonald's and may or may not ultimately do so. But I do intend to wait until after next Friday's official earnings release and re-evaluate at that time and then make a decision.

Regards and Godspeed,

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