This position uses the Covered Calls Advisor's Dividend Capture Strategy. Lennar has an upcoming quarterly ex-dividend of $.375 per share that goes ex-dividend on January 26th, 2022. This is a 50% increase from their prior $.25 regular quarterly dividend and this large increase shows management's confidence in their business prospects. This is equivalent to an absolute annual dividend yield of 1.4% (at the current $107.76 stock price) and more importantly for this Covered Calls position, an equivalent annualized dividend yield of 5.5% = [($.375/$107.76) x (365/23 days-to-expiration)] for the 23 days duration of this position. This dividend is included in the detailed potential return-on-investment calculations below. Either an early assignment on the day prior to the ex-dividend date or on the February 4th, 2022 options expiration date would be desirable to the Covered Calls Advisor given the attractive annualized return-on-investment upon assignment for either outcome.
There are three primary circumstances that provide the most conducive environment for homebuilders' success: demographics, low interest rates, and current Monthly Supply of Houses in the U.S.(Source: Federal Reserve Bank of St. Louis). All three of these factors are currently positive for homebuilders. In terms of demographics, ages 26-32 are the prime ages for first-time buyers and years 2020 to 2024 will see the largest number of young adults in this age category in U.S. history. In terms of interest rates, 10-year Treasury rates below 2.0% provide attractive, affordable financing for new buyers. The current rate is 1.72% and mortgage credit is readily available. Finally, the most recent monthly reading of current supply of houses is 6.5 months. Supply conditions remain attractive to builders until this inventory factor exceeds 7.0 months. Also in this regard, the NAHB Housing Market Index surveys homebuilders monthly on their current (and their estimates about the next 6 months) sentiment (from 0 to 100). The most recent month's (i.e. December 2021) index with a reading of 84 is a good "sellers' market". The Covered Calls Advisor will continue to track these factors and will likely remain invested in monthly Covered Calls in companies in this industry as long as all three of these metrics remain positive. Also important to the Covered Calls Advisor, there is no upcoming quarterly earnings report prior to the February 4th, 2022 options expiration date.
The Covered Calls Advisor intends to give priority to companies with attractive valuations that are also expected to show an earnings per share increase greater than 6% in 2022 compared against their 2021 results. According the the average of the 17 analysts currently following Lennar, they are expected to increase earnings by about 11% in 2022. This would represent a forward P/E ratio of 6.8--a very attractive valuation relative to their prior 5-year average P/E of 10.4. Finally, these analysts have an average target price of $131.00 (a +21.6% increase above today's purchase price of $107.76).
As detailed on the table at the bottom of this post, all nine criteria of
the Dividend Capture Strategy are met
with this position. The Covered Calls Advisor's current Overall Market Meter outlook remains cautious, so the appropriate Covered Calls strategy is to sell in-the-money strike prices.
As detailed below, two potential return-on-investment results are:
- +1.4% absolute return (equivalent to +39.6% annualized return for the next 13 days) if the stock is assigned early (business day prior to the January 26th ex-dividend date); OR
- +1.8% absolute return (equivalent to +28.2% annualized return over the next 23 days) if the stock is assigned on the February 4th options expiration date.
The simultaneous buy/write transaction was:
1/13/2022 Bought 200 Lennar Corp. shares @ $107.76
1/13/2022 Sold 2 LEN 2/04/2022 $103.00 Call options @ $6.18
Note: the Implied Volatility of the Call options was 29.3 when this position was transacted and the Delta (approximately the probability of assignment at expiration) was 72.2.
1/26/2022 Upcoming quarterly ex-dividend of $.375 per share
Two possible overall performance results (including commissions) for this Lennar Corp. Covered Calls position are as follows:
Covered Calls Cost Basis: $20,317.34
= ($107.76 - $6.18) * 200 shares + $1.34 commission
Net Profit Components:
(a) Options Income: +$1,234.66
= ($6.18 * 200 shares) - $1.34 commission
(b) Dividend Income (If options exercised early on January 25th, the business day prior to the Jan. 26th, 2022 ex-div date): +$0.00; or
(b) Dividend Income (If Lennar stock assigned on the Feb. 4th, 2022 options expiration): +$75.00
= ($.375 dividend per share x 200 shares)
+($103.00 - $107.76) * 200 shares; or
(c) Capital Appreciation (If shares assigned at $103.00 strike price at options expiration): -$948.00
+($103.00 - $107.76) * 200 shares
Either outcome provides an attractive return-on-investment result for this Lennar Covered Calls investment. These returns will be achieved as long as the stock is above the $103.00 strike price at assignment. However, if the stock declines below the strike price, the breakeven price of $101.205 = ($107.76 stock price - $6.18 Call options price - $.375 dividend) provides 6.1% downside protection below today's stock purchase price.
At least eight of the nine metrics used in the Covered Calls Advisor's Dividend Capture Strategy spreadsheet (see below) must be 'YES' prior to establishing a new Covered Calls position using the Covered Calls Advisor's Dividend Capture strategy. As shown in the chart below, all nine criteria are achieved for this Lennar Corp. Covered Calls position.
