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The Gap Inc. (NYSE:GPS)

  • Yield: 2.39%
  • Dividend Amount: $0.11
  • Ex-Dividend Date: December 30, 2011
  • Beta: 1.19

The Gap, Inc. operates as a specialty retailing company. The company offers apparel, accessories, and personal care products for men, women, children, and babies under the Gap, Old Navy, Banana Republic, Piperlime, and Athleta brand names. The company was founded in 1969 and is based in San Francisco, California.

There are many dividend capturing strategies, and I have used more than one. Using a call option to hedge against downward price risk is my favorite strategy. I have found I must be highly selective in the companies selected. An average holding period is about three weeks, and sometimes longer.

In this article we will go over an upcoming dividend that I may capture with a minimum amount of risk. The criteria that I use is that I must be able to sell a call option in either the front, or first back month that is in the money, and with enough premium that I will not mind getting exercised early (which happens often and can be a good thing if the trades are executed correctly).

Strategy

In combination with buying the stock and after checking company updates, offer to sell the January $17.50 strike call for $0.46 over the intrinsic value. The option may get exercised early for a gain. If not, after qualifying for the dividend, I will attempt to close out the trade with a gain of near $0.34. Clearly, this dividend capture is more about capturing option premium than dividend income.

With a dividend size of $0.11, the advantage is less compitition for the dividend and writing calls, but you need to have a broker with transaction costs low enough to support this type of investment. My cost to buy and sell the same stock is less than one cent per share after ECN rebates, and I don't pay a commission for option exercises.

Low stock transaction costs along with $0.75 per contract option comissions and The Gap is still a dividend worth capturing for me. I expect to hold the stock for about a month with a total target gain of about $0.55 per share.

The current book value per share is 5.44. For the same fiscal period year-over-year, revenue has improved to $14.66 billion for 2011 vs. $14.20 billion for 2010. The bottom line has rising earnings year-over-year of $1.20 billion for 2011 vs. $1.10 billion for 2010.

The company's earnings before interest and taxes are rising with an EBIT year-over-year of $1.97 billion for 2011 vs. $1.82 billion for 2010.Rising revenue along with rising earnings is a very good sign and what we want to see with our companies. Be sure to check the margins to make sure that the bottom line is keeping up with the top line.

At $18.70, the price is currently below the 200 day moving average of 19.20, and above the 60 day moving average of 18.25. In the last month, the stock has decreased in price -7.28%, with a change from a year ago of -11.63%. When comparing to the S&P 500, the year to date difference is -14.70%.

While the dividend payout percentage is growing at what may appear to be an alarming rate, at less than 28% the dividend still appears very safe into the future.

Remember, you must buy a stock at least three business days before the record date (at least one business day before the ex-dividend date) to qualify for a dividend.

My last step (completed before making a trade on the same day) is to check company announcements, and news sources for possible events that may cause the stock price to move. This is especially important during earnings season.

I research the different call options and calculate the expected probabilities based on Beta, Bid, Offer, Volume traded the current day, open interest, and time value / implied volatility. The Options offer some level of protection from down moves in the stock, and provide revenue to cover the times that the options do not fully cover down moves in the stock. Income is not needed from the option Premiums, so a break even from premiums received/stock losses ratio is a win.

Disclosure: I have no positions in any stocks mentioned, but may initiate a long position in GPS over the next 72 hours.

Disclaimer: I use a proprietary blend of technical analysis, financial crowd behavior, and fundamentals in my short-term trades, and while not totally the same in longer swing trades to investments, the concepts used are similar. Nothing in the article should be considered investment advise, but you may want to use this article as a starting point of your own research with your financial planner.

Source: The Gap: A Good Dividend Capture For Some