Truist is a super-regional bank in Southeast U.S. (note: it is the 6th largest bank in the U.S. by market capitalization) that resulted from the merger completed in late 2019 of SunTrust and BB&T banks. Like many large-cap companies in the Financial Sector, Truist provides only modest future compounded growth prospects, but
they currently pay a $.48 quarterly dividend (3.1% annual dividend yield) with a February 10th, 2022 ex-dividend date. I seek to establish positions in these low growth and dividend paying companies using my "Dividend Capture Strategy" (in situations where the ex-dividend date is in between the initiation date of the Covered Calls position and the options expiration date). The goal of these "Dividend Capture Strategy" positions is
to either to capture the quarterly dividend payment and for the stock
prices to remain above the strike price at
options expiration or to have the position assigned early on the
day prior to the ex-dividend date at a higher
annualized-return-on-investment than would be achieved if the position
was instead assigned on its options expiration date. As is true with this position (see chart with 9 criteria at the bottom of this post), this approach
normally provides
higher annualized-return-on-investment results than would be achieved
with either: (1) Covered Calls in these same stocks during their
non-ex-dividend
months; or (2) A basic buy-and-hold stock purchase.
Truist Financial reported their Q4 2021 earnings recently (on January 18th) which exceeded last year's results by 17% and analysts' estimates by 9.6%. The average target price of the 23 analysts covering Truist is $70.68 (+13.2% above today's purchase price). Like many analysts, I believe regional banks like Truist will benefit this year from increasing consumer loan demand as well as from greater net interest margins from increasing interest rates.
The goal of these "Dividend Capture Strategy" positions is to either capture the quarterly dividend payment and for the stock prices to remain above the strike price at options expiration or to have the position assigned early on the day prior to the ex-dividend date at a higher annualized-return-on-investment than would be achieved if the position was instead assigned on its options expiration date. This approach normally provides higher annualized-return-on-investment results than would be achieved with either: (1) Covered Calls in these same stocks during their non-ex-dividend months; or (2) A basic buy-and-hold stock purchase.
Two potential return-on-investment results for this Truist Financial Covered Calls position are: (a) +1.0% absolute return (equivalent to +42.3% annualized
return for the next 9 days) if the stock is assigned early [on the last trading day prior to the ex-dividend date]; OR (b) +1.9%
absolute return (equivalent to +37.6% annualized return over the next 18
days) if the stock is assigned on the February 18th, 2022 options expiration date.
Truist Financial Corporation(TFC) -- New Covered Calls Position
The transactions were:
2/01/2022 Bought 300 Truist shares @ $62.45
2/01/2022 Sold 3 TFC 2/18/2022 $60.00 Call options @ $3.07
Note: the Implied Volatility of these Call options was 27.5 when this position was established.
2/10/2022 Upcoming quarterly ex-dividend of $.48 per share
Two possible overall performance results (including commissions) for this
Truist Covered Calls position are as follows:
Covered Calls Cost Basis: $17,816.01
= ($62.45 - $3.07) * 300 shares + $2.01 commission
Net Profit Components:
(a) Options Income: +$921.00
= ($3.07 * 300 shares)
(b) Dividend Income (If option exercised early on the business day prior to the ex-div date): +$0.00; or
(b) Dividend Income (If Truist shares assigned at Feb. 18th, 2022 expiration): +$144.00
= ($.48 dividend per share x 300 shares)
(c) Capital Appreciation (If TFC shares assigned early): -$735.00
+($60.00 strike price -$62.45 stock purchase cost) * 300 shares; or
(c) Capital Appreciation (If TFC shares assigned at $60.00 strike price at options expiration): -$735.00
+($60.00- $62.45) * 300 shares
Either outcome would provide an attractive return-on-investment result. These returns will be achieved as long as the stock is above the $60.00 strike price at assignment. If the stock declines below the strike price, the breakeven price of $58.90 ($62.45 -$3.07 -$.48) provides 5.7% downside protection below today's 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 Truist Financial Covered Calls position.
