Seeking Alpha
Profile| Send Message|
( followers)  

The 3M Company (NYSE:MMM) is planning to put more emphasis on its oil and gas and aerospace business operations as noted in the company's Q1 2012 earnings call on April 24, 2012. The company has been involved in oil/gas and aerospace for a long time, but believes these segments have been overlooked and need more focus and investment. This strategy could further diversify the company and increase its competitiveness.

In the earnings call, the company indicated Industrial and Transportation, Safety Security and Protection Services, Health Care and Consumer and Office business segments performed very well in the quarter. However, weakness in the electronics market segment hurt the company's Display and Graphics and Electro and Communications business areas. The company expects the electronics market to pick up as the year progresses. Geographically, 3M's results in the Americas were strong, with strong growth in Latin America. Growth in Asia was somewhat slower and Western Europe "held its own." On a somewhat positive note, the company indicted the economies in Western Europe appear to have stabilized, in spite of the continued issues related to Sovereign debt. Sales for the quarter were $7.5 billion, which represented growth of 2.4% year over year. The company's outlook for 2012 is for earnings in the range of $6.35 to $6.50 per share.

In the 3M's 2012 Outlook Meeting (pdf) held on December 6, 2011, the company indicated governmental revenue would most likely be used to repair broken national balance sheets rather than stimulate growth and expand social welfare. Based on this, the company expects lower economic growth for the foreseeable future.

The company's stock has been down and up over the last year and is closing in on its peak price around $95 experienced in July of 2011 as shown below:

(click to enlarge)

The annual dividend yield for 3M's stock is currently 2.6% and a dividend investor might consider entering a covered call for the company as a way to boost the dividend income for the company. A covered call may be entered by selling a call option against the company's stock. The covered call positions an investment for a potential return, as the price of the stock can be stagnant and yet the position can still yield a profit.

Using PowerOptions tools, a couple of covered calls were found for 3M for January 2013 option expiration as shown below:

The % If Unchanged returns for the two positions are very similar, however, the top position appears a little more attractive, as it has a % If Assigned potential return of 5.8%.

The % If Unchanged potential represents the potential return if the stock price is unchanged at options expiration and the % If Assigned potential return represents the potential return if the stock price is greater than the strike price at option expiration. In this case, the top position enables an investor to take advantage of price appreciation for the stock.

If the stock price is unchanged at option expiration in January of 2013, the top position will return 4.4% (8.9% annualized). If the stock price is greater than or equal to the $90 strike price of the call option at option expiration in January of 2013, the position will return 5.8% (11.8% annualized). These returns do not include potential dividend payments. With two assumed dividend payments during the holding time of $0.59 each, the % If Assigned potential return increases to 7.3% (14.8% annualized). The specific call option to sell is the 2013 Jan 90 at $3.75.

Trade

  • MMM stock (existing or purchased)
  • Sell MMM 2013 January 90 Call at $3.75

A profit/loss graph for one contract of the covered call is shown below:

If the price of the stock increases to around $100, the position can most likely be rolled in order to realize additional potential return.

Source: 3M: More Emphasis On Oil, Gas And Aerospace