5 Covered Write Plays: Federal Realty Investment Trust Is Our Top Choice

Apr. 6.12 | About: Federal Realty (FRT)

"He has all the virtues I dislike and none of the vices I admire."

Winston Churchill

We selected 5 candidates and from this group, we have selected one as our top pick. A covered write strategy is suggested for our top pick; one can use a similar strategy on any of the other candidates if one finds them to be of interest. If you are unfamiliar with a 'Covered writes' strategy, see our piece "Benefits of a Covered Writes Strategy".

Federal Realty Investment Trust (NYSE: FRT) is our play of choice for the following reasons:

  • A good free cash flow of $199 million
  • Net income increased from $98 million in 2009 to $144 million in 2011.
  • Gross profit increased from $362 million in 2009 to $382 million in 2011.
  • Total cash flow from operating activities is more than enough to cover dividend payments.
  • It has a manageable payout ratio of 69%?
  • It is a true dividend king for it has raised its dividend consecutively for 44 years.
  • It has a very strong total three-year return of 142%
  • The low current and quick ratios of are of some concern; however, it does sport an average interest coverage ratio 2.24. If the interest coverage ratio drops to or below 1 we would start to become worried.
  • Total Debt to equity is below 1; it currently stands at 0.87.
  • Revenue is projected to increase from $545 million in 2010 to $602 million in 2013.
  • Funds from operations per share are projected to increase from $3.88 in 2010 to $4.46 in 2013.
  • Even though it has a relatively low yield it has more than made up for this via capital gains. 100K invested in FRT for 10 years has grown to 420K..

Covered call strategy for Federal Realty Investment Trust

Federal Realty Investment Trust faces pretty strong head winds in the $99-$100 ranges Traders could thus put the following strategy into play. Sell the August 100 calls; they are currently trading in the $2.60-3.40 ranges. Let's assume we are able to sell them at $3.00.

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Once you sell the calls, $3.00 per share is deposited in your account. If the stock trades past $100, then your shares will be called, and you will be paid $100 per share. Your total gain will be roughly $3.42 plus the $3.00 premium you were paid per call for a gain of 6.7% based on today's price of $6.58. This is roughly 250% or so above the official inflation rate. In addition, this does not include any dividend payments you might receive while this strategy is in play, which will only serve to enhance your gains. If the stock does not trade above 100, then you get to keep the premium of $3.00. If your shares are called you still walk away with a nice gain and there is nothing to stop you from repeating the whole process again.

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Many key ratios will be covered in this article and investors would do well to get handle on some of the more important ones which are dealt with below.

Long-term debt-to-equity ratio - is the total long term debt divided by the total equity. The amount of long-term debt a company carries on its balances sheet is very important for it indicates the amount of money a company owes that it doesn't expect to pay off in the next year. A balance sheet that illustrates that long term debt has been decreasing for a few years is a sign that the company is doing well. When debt levels fall, and cash levels increase the balance sheet is said to be improving and vice versa. If a company has too much debt on its books, it could end up being overwhelmed with interest payments and risk having too little working capital which could in the worst case scenario lead to bankruptcy.

Operating cash flow -is generally a better metric than earnings per share because a company can show positive net earnings and still not be able to properly service its debt; the cash flow is what pays the bills.

The payout ratio -tells us what portion of the profit is being returned to investors. A pay out ratio over 100% indicates that the company is paying out more money to shareholders, then they are making; this situation cannot last forever. In general if the company has a high operating cash flow and access to capital markets, they can keep this going on for a while. As companies usually only pay the portion of the debt that is coming due and not the whole debt, this technique/trick can technically be employed to maintain the dividend for sometime. If the payout ratio continues to increase, the situation warrants close monitoring as this cannot last forever; if your tolerance for risk is a low, look for similar companies with the same or higher yields, but with lower payout ratios. Individuals searching for other ideas might find this article to be of 5 Covered Writes: 2 Excellent, 2 Good And 1 Middling

Current Ratio -is obtained by dividing the current assets by current liabilities. This ratio allows you to see if the company can pay its current debts without potentially jeopardizing their future earnings. Ideally the company should have a ratio of 1 or higher.

Price to free cash flow- is obtained by dividing the share price by free cash flow per share. Higher ratios are associated with more expensive companies and vice versa; lower ratios are generally more attractive. If a company generated 400 million in cash flow and then spent 100 million on capital expenditure, then its free flow is $300 million. If the share price is 100 and the free cash flow per share are $5, then company trades at 20 times-free cash flow. This ratio is also useful because it can be used as a comparison to the average within the industry; this gives you an idea of how the company you are interested in holds up to the other companies within the industry.

Interest coverage- is usually calculated by dividing the earnings before interest and taxes for a period of 1 year by the interest expenses for the same time period. This ratio informs you of a company's ability to make its interest payments on its outstanding debt. Lower interest coverage ratios indicate that there is a larger debt burden on the company and vice versa. For example if a company has an interest ratio of 11.8, this means that it covers interest expenses 11.8 times with operating profits.

Price to tangible book is- obtained by dividing share price by tangible book value per share. The ratio gives investors some idea of whether they are paying too much for what would be left over if the company were to declare bankruptcy immediately. In general stocks that trade at higher price to tangible book value could leave investors facing a great percentage per share loss than those that trade at lower ratios. The price to tangible book value is theoretically the lowest possible price the stock would trade to. Additional key metrics are addressed in this article 5 Dividend Champs: Halliburton Our Top Pick

Federal Realty Investment Trust

Industry: REITs

Free Cash Flow: $199 million

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Growth

  1. Net income for the past three years
  2. Net Income ($mil) 2009 = $98
  3. Net Income ($mil) 2010 = $123
  4. Net Income ($mil) 2011 = $144
  1. Total cash flow from operating activities
  2. 2009 = $256.77 million
  3. 2010 = $256.74 million
  4. 2011 = $244.72 million
  1. Cash And Cash Equivalents for the past 3 years
  2. 2009= $135.3 million
  3. 2010= $15.7 million
  4. 2011= $67.8 million

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Performance

  1. Key Ratios
  2. Price to Sales = 11.13
  3. Price to Book = 5.09
  4. Price to Tangible Book = 5.09
  5. Price to Cash Flow = 41.20
  6. Price to Free Cash Flow = 403
  1. LT Debt to Equity = 1.75
  2. Total Debt to Equity = 0.87
  3. Interest Coverage = 2.24
  4. Asset Turnover = 0.15
  1. ROE = 10.50%
  2. Return on Assets = 4.2%
  3. Quarterly Earnings Growth = -5.8%

Dividend history and sustainability

  1. Dividend yield 5 year average = 3.54%
  2. Payout ratio = 0.69
  3. Dividend growth rate 3 year average = 2.8%
  4. Dividend growth rate 5 year average = 3.7%
  5. Consecutive dividend increases = 44 years
  6. Total return last 3 years = 149%
  7. Total return last 5 years = 13%

Company: Exxon Mobil Corporation (XOM)

Levered Free Cash Flow = 19.87B

Basic Key ratios

Percentage Held by Insiders = 0.2

Number of Institutional Sellers 12 Weeks = 3

Growth

  1. Net Income ($mil) 12/2011 = 41060
  2. Net Income ($mil) 12/2010 = 30460
  3. Net Income ($mil) 12/2009 = 19280
  4. 12months Net Income this Quarterly/ 12months Net Income 4Q's ago = 34.8
  5. Quarterly Net Income this Quarterly/ same Quarter year ago = 1.62
  1. EBITDA ($mil) 12/2011 = 89087
  2. EBITDA ($mil) 12/2010 = 67978
  3. EBITDA ($mil) 12/2009 = 47242
  4. Net Income Reported Quarterlytr ($mil) = 9400
  5. Annual Net Income this Yr/ Net Income last Yr = 34.8
  6. Cash Flow ($/share) 12/2011 = 11.82
  7. Cash Flow ($/share) 12/2010 = 8.97
  8. Cash Flow ($/share) 12/2009 = 6.62
  1. Sales ($mil) 12/2011 = 486429
  2. Sales ($mil) 12/2010 = 383221
  3. Sales ($mil) 12/2009 = 310586
  1. Annual EPS before NRI 12/2007 = 7.28
  2. Annual EPS before NRI 12/2008 = 8.47
  3. Annual EPS before NRI 12/2009 = 4.01
  4. Annual EPS before NRI 12/2010 = 6.22
  5. Annual EPS before NRI 12/2011 = 8.42

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Dividend history

  1. Dividend Yield = 2.19
  2. Dividend Yield 5 Year Average 12/2011 = 2.19
  3. Dividend Yield 5 Year Average 09/2011 = 2.19
  4. Annual Dividend 12/2011 = 1.85
  5. Annual Dividend 12/2010 = 1.74
  6. Forward Yield = 2.19
  7. Dividend 5 year Growth 12/2011 = 6.81

Dividend sustainability

  1. Payout Ratio 06/2011 = 0.22
  2. Payout Ratio 5 Year Average 12/2011 = 0.26
  3. Payout Ratio 5 Year Average 09/2011 = 0.26
  4. Payout Ratio 5 Year Average 06/2011 = 0.26
  5. Change in Payout Ratio = -0.04

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = -5.26
  2. Next 3-5 Year Estimate EPS Growth rate = 5.69
  3. EPS Growth Quarterly(1)/Q(-3) = 107.94
  4. ROE 5 Year Average 12/2011 = 27.42
  5. ROE 5 Year Average 09/2011 = 27.42
  6. ROE 5 Year Average 06/2011 = 27.79
  7. Return on Investment 06/2011 = 23.96
  8. Debt/Total Cap 5 Year Average 12/2011 = 6.36
  9. Debt/Total Cap 5 Year Average 09/2011 = 6.36
  10. Debt/Total Cap 5 Year Average 06/2011 = 6.32
  1. Current Ratio 06/2011 = 0.94
  2. Current Ratio 5 Year Average = 1.19
  3. Quick Ratio = 0.75
  4. Cash Ratio = 0.75
  5. Interest Coverage Quarterly = 228.21

Valuation

  1. Book Value Quarterly = 33.54
  2. Price/ Book = 2.56
  3. Price/ Cash Flow = 7.26
  4. Price/ Sales = 0.83
  5. EV/EBITDA 12 Mo = 4.5

Company: Kinder Morgan (KMI)

Levered Free Cash Flow = 292.94M

Growth

  1. Net Income ($mil) 12/2011 = 594
  2. Net Income ($mil) 12/2010 = -41
  3. Net Income ($mil) 12/2009 = 495
  4. 12months Net Income this Quarterly/ 12months Net Income 4Q's ago = 1196.15
  5. Quarterly Net Income this Quarterly/ same Quarter year ago = 147.22
  1. EBITDA ($mil) 12/2011 = 2817
  2. EBITDA ($mil) 12/2010 = 2221
  3. EBITDA ($mil) 12/2009 = 2775
  4. Net Income Reported Quarterlytr ($mil) = 156
  5. Annual Net Income this Yr/ Net Income last Yr = 1539.57
  6. Cash Flow ($/share) 12/2011 = 2.83
  1. Sales ($mil) 12/2011 = 8265
  2. Sales ($mil) 12/2010 = 8191
  3. Sales ($mil) 12/2009 = 7185
  1. Annual E PS before NRI 12/2011 = 0.67

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Dividend history

  1. Dividend Yield = 3.10
  2. Annual Dividend 12/2011 = 0.74
  3. Annual Dividend 12/2010 = 0
  4. Forward Yield = 3.16

Dividend sustainability

  1. Payout Ratio 06/2011 = 1.79

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = 24.93
  2. Next 3-5 Year Estimate EPS Growth rate = 26.06
  3. Return on Investment 06/2011 = 1.97
  4. Debt/Total Cap 5 Year Average 06/2011 = 61.46
  1. Current Ratio 06/2011 = 0.37
  2. Current Ratio 5 Year Average = 0.48
  3. Quick Ratio = 0.33
  4. Cash Ratio = 0.13
  5. Interest Coverage Quarterly = 3.55

Valuation

  1. Book Value Quarterly = 14.37
  2. Price/ Book = 2.73
  3. Price/ Cash Flow = 13.88
  4. Price/ Sales = 2.55
  5. EV/EBITDA 12 Mo = 12.41

Company: Abbott Labs (ABT)

Levered Free Cash Flow = 9.10B

Basic Key ratios

  1. Percentage Held by Insiders = 0.24
  2. Number of Institutional Sellers 12 Weeks = 12

Growth

  1. Net Income ($mil) 12/2011 = 4728
  2. Net Income ($mil) 12/2010 = 4626
  3. Net Income ($mil) 12/2009 = 5746
  4. 12months Net Income this Quarterly/ 12months Net Income 4Q's ago = 2.2
  5. Quarterly Net Income this Quarterly/ same Quarter year ago = 12.35
  1. EBITDA ($mil) 12/2011 = 8773
  2. EBITDA ($mil) 12/2010 = 8890
  3. EBITDA ($mil) 12/2009 = 9803
  4. Net Income Reported Quarterlytr ($mil) = 1619
  5. Annual Net Income this Yr/ Net Income last Yr = 2.21
  6. Cash Flow ($/share) 12/2011 = 6.66
  7. Cash Flow ($/share) 12/2010 = 5.9
  8. Cash Flow ($/share) 12/2009 = 5.1
  1. Sales ($mil) 12/2011 = 38851
  2. Sales ($mil) 12/2010 = 35167
  3. Sales ($mil) 12/2009 = 30765
  1. Annual EPS before NRI 12/2007 = 2.84
  2. Annual EPS before NRI 12/2008 = 3.32
  3. Annual EPS before NRI 12/2009 = 3.73
  4. Annual EPS before NRI 12/2010 = 4.17
  5. Annual EPS before NRI 12/2011 = 4.67

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Dividend history

  1. Dividend Yield = 3.14
  2. Dividend Yield 5 Year Average 12/2011 = 3.1
  3. Dividend Yield 5 Year Average 09/2011 = 3.1
  4. Annual Dividend 12/2011 = 1.88
  5. Annual Dividend 12/2010 = 1.72
  6. Forward Yield = 3.34
  7. Dividend 5 year Growth 12/2011 = 9.9

Dividend sustainability

  1. Payout Ratio 06/2011 = 0.41
  2. Payout Ratio 5 Year Average 12/2011 = 0.44
  3. Payout Ratio 5 Year Average 09/2011 = 0.44
  4. Payout Ratio 5 Year Average 06/2011 = 0.45
  5. Change in Payout Ratio = -0.03

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = 15.32
  2. Next 3-5 Year Estimate EPS Growth rate = 8.01
  3. EPS Growth Quarterly(1)/Q(-3) = -159.34
  4. ROE 5 Year Average 12/2011 = 28.43
  5. ROE 5 Year Average 09/2011 = 28.43
  6. ROE 5 Year Average 06/2011 = 28.31
  7. Return on Investment 06/2011 = 19.46
  8. Debt/Total Cap 5 Year Average 12/2011 = 34.2
  9. Debt/Total Cap 5 Year Average 09/2011 = 34.2
  10. Debt/Total Cap 5 Year Average 06/2011 = 34.06
  1. Current Ratio 06/2011 = 1.54
  2. Current Ratio 5 Year Average = 1.43
  3. Quick Ratio = 1.32
  4. Cash Ratio = 0.83
  5. Interest Coverage Quarterly = 48.7

Valuation

  1. Book Value Quarterly = 15.74
  2. Price/ Book = 3.88
  3. Price/ Cash Flow = 9.18
  4. Price/ Sales = 2.47
  5. EV/EBITDA 12 Mo = 11.41

Company: Mercury General Cp (MCY)

Levered Free Cash Flow = 868.48M

Basic Key ratios

  1. Percentage Held by Insiders = 34.7

Growth

  1. Net Income ($mil) 12/2011 = 191
  2. Net Income ($mil) 12/2010 = 152
  3. Net Income ($mil) 12/2009 = 403
  4. 12months Net Income this Quarterly/ 12months Net Income 4Q's ago = 25.6
  5. Quarterly Net Income this Quarterly/ same Quarter year ago = 436.06
  1. EBITDA ($mil) 12/2011 = 296
  2. EBITDA ($mil) 12/2010 = 231
  3. EBITDA ($mil) 12/2009 = 621
  4. Net Income Reported Quarterlytr ($mil) = 79
  5. Annual Net Income this Yr/ Net Income last Yr = 25.61
  6. Cash Flow ($/share) 12/2011 = 3.62
  7. Cash Flow ($/share) 12/2010 = 2.86
  8. Cash Flow ($/share) 12/2009 = 4.02
  1. Sales ($mil) 12/2011 = 2777
  2. Sales ($mil) 12/2010 = 2776
  3. Sales ($mil) 12/2009 = 3121
  1. Annual EPS before NRI 12/2007 = 4.09
  2. Annual EPS before NRI 12/2008 = 2.12
  3. Annual EPS before NRI 12/2009 = 3.23
  4. Annual EPS before NRI 12/2010 = 2.1
  5. Annual EPS before NRI 12/2011 = 2.79

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Dividend history

  1. Dividend Yield = 5.5
  2. Annual Dividend 12/2011 = 2.41
  3. Annual Dividend 12/2010 = 2.37
  4. Forward Yield = 5.53
  5. Dividend 5 year Growth = 15.2%

Dividend sustainability

  1. Payout Ratio 06/2011 = 0.88
  2. Payout Ratio 5 Year Average 06/2011 = 0.86
  3. Change in Payout Ratio = 0.02

Performance

  1. Percentage Change Price 52 Weeks Relative to S&P 500 = 6.16
  2. Next 3-5 Year Estimate EPS Growth rate = 2.11
  3. EPS Growth Quarterly(1)/Q(-3) = 4-193.33
  1. ROE 5 Year Average 06/2011 = 9.17
  2. Return on Investment 06/2011 = 7.53
  3. Debt/Total Cap 5 Year Average 06/2011 = 8.26
  1. Current Ratio 06/2011 = 0.41
  2. Current Ratio 5 Year Average = 0.48
  3. Quick Ratio = 0.41
  4. Cash Ratio = 0.23
  5. Interest Coverage Quarterly = 122.63

Valuation

  1. Book Value Quarterly = 33.87
  2. Price/ Book = 1.3
  3. Price/ Cash Flow = 12.18
  4. Price/ Sales = 0.87
  5. EV/EBITDA 12 Mo = 7.14

Conclusion

The markets are rather overbought and need to let out some steam; prudent investors would do well to wait for a strong pullback before committing funds to this market. A pull back in the 7-12% ranges would qualify as a strong pull back.

Disclaimer: This list of stocks is meant to serve as a starting point. Please do not treat this as a buying list. It is imperative that you do your due diligence and then determine if any of the above plays meet with your risk tolerance levels. The Latin maxim caveat emptor applies-let the buyer beware

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Note on the data in this piece: EPS, Price, EPS surprise charts obtained from zacks.com. A major portion of the historical data used in this article was obtained from zacks.com. Consensus estimate analysis table sourced from reuters.com. Free cash flow yield, income from cont operations, and revenue growth sourced from Ycharts.com. Option table sourced from yahoofinance.com