Classic Pepsi Cans

The Board of Directors of PepsiCo, Inc. (NYSE: PEP) today declared a four percent increase in the company’s annual dividend, from the current annual rate of $2.06 to $2.15 per share on PepsiCo common stock. It is the company’s 40th consecutive annual dividend increase.

The quarterly dividend of $0.5375 is payable June 29, 2012, to shareholders of record on June 1, 2012.

For the prospectus and other information on the Fallen Angels Income Fund (FAINX), please click here.

An added short-term bonus will be the addition on Phillips 66 to the S&P 500, joining ConocoPhillips in the index.

At the same time, the new Phillips 66 will join its parent, ConocoPhillips, in the S&P 500, replacing supermarket chain SUPERVALU(SVU). In a cascading series of changes, SUPERVALU will move into the S&P MidCap 400, replacing American Greetings(AM), which will move into the S&P SmallCap 600, replacing The Standard Register(SR).

Source:
Phillips 66 To Be Added To S&P 500 After April 30 Spin (Stock Spin Offs)

The prospectus for the Fallen Angels Income Fund (FAINX) can be found here.

Target covered calls and April option expiration

The rally was gathering steam and I wanted to let our positions run. Plus, our positions were not stretched enough were I would normally look to sell a covered call. With Volatility declining too, the premiums just weren’t enough to entice me to trade. So I sat, except on one position, Target (TGT).

Target is a position in our Enhanced Dividend Income Portfolio and a position in the fund I now manage, The Fallen Angels Income Fund (FAINX). For a prospectus and other information on The Fallen Angels Income Fund, click here.

By the end of February, Target (TGT) was the one position that looked stretched. It’s RSI was in overbought territory, the MACD looked like it had peaked and was about to roll over, and the stock had moved so far from its moving averages that it looked perfect for at least a consolidation move. Target begged to have a call written against it and I did at a strike of $57.50.

Then the stock proceeded to trade higher.

Chart courtesy of Stockcharts.com

Our timing on the trade was off. Even though our covered call immediately went in the money, we we’re OK with it. Our fair value on Target (TGT) is about $57 per share and we can do a lot worse than buying a stock when its undervalued and selling it when it becomes fairly valued. Granted, I didn’t want to have our position in Target called away just yet, we already have plenty of cash on the sidelines, about 12% in the Income fund and 10% in the Enhanced Dividend Portfolio. Plus, in the Fallen Angels Income Fund (FAINX), we still have a few closed-end fund positions that I would rather sell if we needed the cash for a better investment opportunity.

Our cash concerns were put to ease as the overbought condition in Target began to unwind. The stock fell back below our Call’s strike price and the option expired worthless last week.

Bank of New York Mellon (BK) is one the world’s largest custody banks and it is a position in our strategic dividend strategy and in our mutual fund, The Fallen Angels Income Fund (FAINX). Bank of New York Mellon is first and foremost a position in both strategies because we believe it to be undervalued. Second, it is a position in both strategies because of its current dividend and the potential for Bank of New York Mellon to grow its dividend.

Like our position in JP Morgan Chase (JPM) the Bank of New York Mellon passed its stress test last week and can return more capital to shareholders.

Bank of New York Mellon Corp. (BK), the world’s largest custody bank, said its board authorized the repurchase of as much as $1.16 billion of common stock following the Federal Reserve’s test of how the bank would fare in an economic decline.

We like the use of capital to buyback shares when the stock is cheap but we’re a little disappointed that we’ll have to wait at least 12 more months before the bank raises its dividend.

Source:

BNY Mellon to Buy Back as Much as $1.16 Billion in Stock (Bloomberg)

JP Morgan (JPM) is a position in our strategic dividend portfolio and a position in our Fallen Angels Income Fund (FAINX). The equity portion of the Fallen Angels Income Fund and our strategic dividend strategy focus on finding not only undervalued dividend paying stocks but stocks that have the potential to grow their dividend.

Entering this year we saw the financial sector, predominantly the large banks, having the potential to greatly increase their dividend payouts. They just needed to pass the Federal Reserve stress test and get any new capital plan approved by the Fed too. JP Morgan did both.

JPMorgan, the biggest U.S. bank and arguably one of the strongest, kicked off the releases by announcing that it had been cleared to raise its dividend by 20 percent and spend as much as $12 billion buying back stock this year and $3 billion more in the first three months of 2013.

Fed Stress Tests an Investor Payday for Some (Reuters)

The 20% increase will raise the quarterly dividend up to $0.30 per share. At today’s prices JP Morgan’s dividend yield will increase to 2.68%. The $12 billion stock buyback will also reduce the current outstanding float by 7% at today’s prices.

Exelon (EXC) has been a recent laggard in both our strategic dividend portfolio and in the equity portion of the Fallen Angels Income Fund (FAINX). Besides depressed natural gas prices and a renewed negative sentiment on nuclear energy, Exelon’s share price has been dragged down by the on-hold status of its potential merger with Constellation Energy (CEG).

As with all utility mergers, it is a long process of review by the regulatory agencies but that overhang has been removed. The Federal Energy Regulatory Commission approved the merger late last Friday and the $7.9 billion merger closed yesterday.

The stock price reacted strongly to the news.

Chart courtesy of Stockcharts.com

Exelon was already the nation’s largest supplier of nuclear energy, supplying 17% of energy to the mid-west and Atlantic area and almost 4% of all U.S. electricity. Adding Constellation Energy (CEG) creates an even larger utility giant. Constellation Energy is the largest retail power supplier; it supplies about 14% of all energy to the commercial and industrial market.

The merger approval is a positive long-term catalyst for Exelon and so far it’s provided a short-term one too.

Hewlett-Packards printing division continues to decline

Almost a year ago I discussed what I see as the Holy Grail of investing. Being long disruptive technologies while being short the disrupted technologies. Being perfectly positioned for both long-term trends.

What did I see as a disruptive technology?

Tablet computers, Apple’s (AAPL) iPad.

What technologies and companies would tablet computers disrupt?

Printing and companies heavily reliant on printing. Companies like Hewlett-Packard (HPQ).

Tablets, by providing an easy and intuitive way of viewing documents are reducing our need to print. And by increasing demand for ebooks, digital magazines, and digital newspapers tablets are reducing commercial printing demand too. As The Financial Times reports, printing is in danger of no longer being the cash cow it once was for Hewlett-Packard (HPQ).

Significant declines in profit margins in its services and imaging and printing divisions compared with a year before also pushed down profits, leaving HP with a 44 per cent decline in net income for the period, to $1.5bn.

Imaging and printing sales are down 7% from a year ago.

So how has a long position in the leading tablet maker, Apple Inc., paired with a short position in Hewlett-Packard (HPQ) worked out?

Pretty well.

Chart courtesy of Stockcharts.com

Is Hewlett-Packard’s destiny the same as the last great buggy whip maker? No.

Hewlett-Packard still still has other divisions to drive their business and they still have many years to use the remaining cash flow from their printer division to help fuel their turnaround. Plus, there will still be demand for printing. Even if printing were to completely disappear, it takes a good amount of time for old dominant technologies to die off. The last typewriter factory just shut down last year.

Hewlett-Packard is definitely a Fallen Angel now and has found its way into the portfolio of Baupost Group, the large value based hedge fund run by Seth Klarman. However, the trend is set, printing demand is in decline and Hewlett-Packard will need to find a new cash cow.

January Option Expiration

For those new to the site, our Enhanced Dividend Income portfolio is primarily focused on finding high-quality companies that generate a high return on capital but are also under-valued and pay a meaningful dividend, 3-5%. We’re also looking for companies with good payout ratios and that have the ability to grow their dividend. The enhanced part is strategically using covered calls to generate extra return. This is not a buy-write strategy. We will sell a covered call when we see an opportunity to. It could be during a period of high volatility when option premiums are high and/or when a position has become over-extended in the short-run. We will usually only have a few options in the portfolio at a time and it is very possible that certain dividend income positions will not have call options ever written against them.

ConocoPhillips

The end of 2011 provided a lot of opportunities to sell covered calls against our oil and energy positions. We already sold one covered call against our ConocoPhillips (COP) position that expired worthless in November of 2011 and in January of this year we had another one.

Chart courtesy of Stockcharts.com

ConocoPhillips covered call set-up

For the last part of 2011 ConocoPhillips (COP) entered a trading range with a resistance area around $74 and the lowest support price around $66. After November’s option expiration ConocoPhillips rallied back up. The stock got close to $74 and started to sell-off again. We saw a declining RSI and the MACD crossing over. Option premiums were still very high and we could sell a well out-of-the-money January call option for a decent return. The strike price on our call option was $77.50.

ConocoPhillips dipped a little further after our trade but then again rallied up to around $74. The stock couldn’t clear resistance and our option expired worthless.

Eli Lilly

The second covered call we had expiring in January was for our position in Eli Lilly (LLY).

Chart courtesy of Stockcharts.com

Eli Lilly covered call set-up.

We’ve held Eli Lilly for a while now, collecting a decent amount of dividends and option premium. The strong move in late 2011 brought higher premiums and the stock close to our estimate of fair value. We were content to let the position be called away from us at this stage. We sold options that were close to being in-the-money but still left a little more room to participate in a further run-up. The strike price on our call options were $42. However, we also had the MACD rolling-over after a big run-up. If the stock rolled over too we would have collected a larger premium to help off-set price drop.

The stock did reach $42 but well before the expiration date. The stock then rolled over with the MACD causing our call option to expire worthless.

ConocoPhillips (COP) and Eli Lilly (LLY) remain in our Enhanced Dividend Income portfolio but we have not had another opportunity to sell any more calls against them.

Regal Entertainment Group (RGC) owns 1,222,780 shares of RealD (RLD), maker of digital 3D cinema systems. At one point, Regal’s holdings were worth $42.8 million. Now? Not so much.

Chart courtesy of Stockcharts.com

Shares in RealD are trading around $8.76, a 74% decline from its highs set back in May of 2011. Regal Entertainment Group’s stake in RealD is now worth around $10.7 million.

We shouldn’t feel too bad for Regal Entertainment Group because their cost basis is a paltry $0.00667 per share.

In connection with the RealD, Inc. motion picture license agreement, the Company received a ten-year option to purchase 1,222,780 shares of RealD, Inc. common stock at approximately $0.00667 per share. The stock options vest in three tranches upon the achievement of screen installation targets. During the year ended December 30, 2010, the Company vested in all three tranches to purchase a total of 1,222,780 shares of RealD, Inc. common stock. The Company exercised its right to purchase shares of RealD, Inc. common stock during December 2010.

-Regal Entertainment Group 2010 10-K

Thanks to RealD’s aggressive option granting policy, Regal Entertainment Group will still walk away with a large gain. That is, unless, 3D is just a gimmick and movie goers stop paying higher prices to see bad movies in funny glasses?

Cheaper and faster data is and will have profound effects on businesses other than computing, like healthcare.

The Wall Street Journal reported this morning that Life Technologies (LIFE) is on the verge of sequencing a person’s entire genetic code for $1,000 and doing it in a day.

The quest to harness the power of DNA to develop personalized medicine is on the threshold of a major milestone: the $1,000 genome sequencing.

Life Technologies Corp., a Carlsbad, Calif., genomics company, plans to introduce Tuesday a machine it says will be able to map an individual’s entire genetic makeup for $1,000 by the end of this year. Moreover, the machine and accompanying microchip technology, both developed by the company’s Ion Torrent unit, will deliver the information in a day, the company says.

The opportunities in highly-personalized medicine are immense. I’m excited to see what new medical breakthroughs are a direct result of cheaper and faster DNA sequencing. I’m also to excited to see how Cheaper DNA sequencing spills over into our daily lives. 23andMe is already one area.

Source:
Soon, $1,000 Will Map Your Genes (Wall Street Journal)