Revisiting an article I wrote about Verizon (VZ) on June 29th, I penned about the stock slowing down and advised on a short term income play. The stock did slow down from its strong bullish climb and the income play turned out profitable. This is the original trade I wrote about:
The Options Play
Verizon is presently trading at about 43.88 and we expect it to continue to move up, but not as fast. If the stock continues to move in the same trend, we should have a continued move up but it will be slightly bullish. For this reason we are going to look at a Bull Call Spread but buy the first call (ITM).
- Buy an August 2012 call with a strike of '43' (priced at $1.26)
- Sell an August 2012 call with a Strike of '44' (priced at $0.69)
- Net Debit to Start: $0.57
- Maximum Profit: $0.43
- Maximum Risk: net debit
- Maximum Length of Play: 2 months
Reasoning behind the Play
- Verizon is Bullish and still has a lot of bullishness in it.
- Considering the large dividend and U.S. market (security) money should continue to pour into the stock.
- I am expecting the move up to slow down (for a season) now but not stop.
This is what I did to reverse the position:
- Sell the Aug. 43 for $1.04
- Buy the Aug. 44 for $0.13
- ($1.04 - $0.13)= $0.91 gross profit
- ($0.91 gross profit - $0.57 net debit)= $0.34 net profit
- ROI- 54.4%
Move Away from Subsidies should Keep Dividends Steady
It is nice when plays work out good like that! Now that Verizon has slowed down I am wondering if its dividend will be affected by a slowdown in revenue in the near future. But there is a change taking place within the mobile phone industry as companies are looking for ways to increase profits. It started with T-Mobile when it cut cell phone subsidies to improve profitability. Verizon and AT&T (T) have followed suit. As an example of how profitable this can make the companies, T-Mobile had strong U.S. earning numbers as it reduced subsidies by 38% and Verizon is adding a tariff when consumers by smartphones; plus they must plans with unlimited text and voice. This is shaking the foundation of handset producers as HTC Corp. missed handset revenue estimates with lower forecast for the fall. Google (GOOG) is going to lay off thousands from Motorola because of light production levels.
Since Verizon and other carriers are weaning costumers off big subsidies, how will this impact the production companies? The mobile phone market sub growth has slowed and was expected to be flat in 2013, so the huge financial layout for advertising that companies like Verizon have done in the past isn't taking place as all these carriers are all backing off subsidies. The bigger production companies may have enough cash to market but smaller carriers are going to struggle. But the movement away from subsidies will help Verizon's bottom line. Therefore it should be able to keep its 4.48% dividend growing.
(click to enlarge)
Technically Speaking
It was in July that it looks like the stock peaked with a double top. Since the last peak at the beginning of August, the stock appears to have started a move down. It has been gradual and it has not moved a lot. Will it continue to move down or is this just a consolidation phase before it continues up? If we observe the RSI indicator, the move has barely gone below the '50' marker and this is important. It shows that this gradual move is not a strong move. If it was stronger, the RSI would be well below the '50' level. On the MACD we are just seeing the MA's touch the '0' line. It will be important to see if it continues down or if it will now be ready to turn up again. So far it is a steady move down as it has just barely inched below the 50 day MA also. It will be important to see if this line is used to show resistance. I am not sure if this is a consolidation phase yet or not. But the retreat is weak at best, so I would not define it as a reversal just yet.
If you are Interested in Long Term Investing
I believe the markets are still favorable for defensive stocks with good dividends. Verizon is one of those stocks with a nice dividend of 4.48% and with the change in subsidies; the company has found a way to lower its capital expenditures. This should keep the dividend steady to say the least. So I believe investing in the stock at this time for an income investor may still be profitable. If an investor is also interested in growth, I may wait a bit until I see if the stock has reversed direction or not.
Short Term Income Investing
I make a lot of suggestions about short term income investing. I like Verizon for this purpose but right now I would wait before I would create a short term income play. The reason for this is the same as I would advise for a growth investor. The stock has moved off its high the last 3 weeks, but it is too new to really understand the direction of the stock. With the expected flattening of the smartphone industry in 2013 I am not sure if the stock is going to continue up this year or not. I would want a better defined pattern before I would suggest a short term play.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
