Generating Serious Income With Tupperware

| About: Tupperware Brands (TUP)


Tupperware has had a rough go in the last few years.

As a result, the "investment bar" looks quite a bit lower today.

This article talks about generating serious income with Tupperware.

When you look at a security like Tupperware (NYSE:TUP), there are things that you might not like. For instance, per share earnings have gone from around $5.40 back in 2013 down closer to an expectation of $4.30 this year. In turn, the payout ratio has jumped to over 60%. The balance sheet could be better: Value Line gives the firm an "A" rating on its financial strength scale and for S&P the credit rating is "BBB-." And the emerging market story may not play out. These are legitimate concerns.

However, there are also things to like. The company is still on track to earn $200 million or so, equating to a starting earnings multiple near 12 or 13. Anticipated earnings growth, now off a much lower base, is rather robust. And the dividend has been held steady for the past three years, at $0.68 per quarter, but the current yield now equates to 5%.

In effect, you don't need much improvement from this point for an investment to work out all right or better. A 5% starting yield and low-teen valuation make for a much lower "investment bar." Granted you need some sort of positive result - you can't see continual decline and still do well. Yet even a "slow growth" scenario, say 3% growth instead of the expectation closer to 10%, could work out well.

So one way to generate serious income, especially in comparison to many common share alternatives, is to simply own shares of Tupperware. You get a reasonably well covered 5% yield that's apt to grow should the company regain its footing.

An additional possibility to think about is owning the security and selling call options against your position. Let's survey the field to get a feel for what this might look like. Ordinarily I focus on only one set of expiration dates. For this exercise, let's look across time.

There are presently four available option expiration dates for Tupperware: January, February, April and July.

For the January 20th, 2017 expiration date, the call option with a $55 strike price has a bid of $1.20 - call it $1.05 to account for frictional expenses and fluctuations. This means that if you owned at least 100 shares today you could agree to sell at $55 per share and generate ~$105 in "extra" income. (That may be taxed differently than dividends.)

One of two things happen with this agreement: either the option is exercised or it is not. If the option is not exercised, you continue to hold your shares of Tupperware. However, you received the ~$105 in option premium upfront, good for a yield of 1.9%. When you're already dealing with a security paying out 5%, you can see how this sort of thing can begin to translate to serious income.

If the option is exercised, you'd receive ~$5,500 in sale proceeds (less fees) plus the ~$105 in upfront option premium. Your return based on today's price would be about 3.8% in the course of one month. The risk is that shares could go materially higher, to say $60 or $70 and you'd be "stuck" selling at $55. That's a real risk.

Which brings up two important points. 1) This is why it's paramount to be content with either side of the agreement. And 2) a 3.8% return in 30 days isn't exactly a poor consolation prize.

Let's check in on some other possibilities.

The February expiration date (58 days away) with the same $55 strike price has a bid of $2.20 - call it $2.05 for our purposes. So you'd either collect an "extra" 3.8% yield and continue holding shares or agree to sell with a 5.6% gain over the course of two months.

The $60 strike price for February has a $0.75 bid, call it $0.60. So you'd generate an "extra" 1.1% yield or agree to sell at a 12.2% gain prior to thinking about frictional expenses.

Moving to the April expiration (121 days away) the $55 strike price has a bid of $2.95 (think ~$2.80 or a whole year's worth of dividends). In this scenario, you'd either collect an "extra" 5.2% yield or agree to sell at a 7% gain. And if the option is not exercised prior to the likely dividend payment in April you'd collect that as well.

The $60 strike price for April has a bid of $1.25. So you could generate an "extra" 2% yield or else agree to sell at a 13% higher price.

Finally, the July 2017 expiration (212 days away) with a $55 strike price has a bid of $4.00. At $3.85 in net proceeds, this would equate to an "extra" yield of 7.1%. Moreover, you might also collect two dividend payments along the way, equating to a total cash flow of 9.7% by July of next year. If the option is exercised, you would be agreeing to sell at a value that is 9% to 11.5% higher than the current value, depending on timing.

The $60 strike price for July has a bid of $2.30. This equates to an "extra" yield of 4% or else agreeing to sell at a 15% to 17.6% gain as compared to today's mark. Or even the $65 strike price still offers a ~$0.60 net premium. That would add 1.1% in "extra" cash flow for the shareholder that continues to hold or else would mean agreeing to sell with a 21% to 24% gain in the next seven months.

In short, there are a whole lot of ways to think about generating additional income from Tupperware. And we didn't even talk about getting paid to agree to buy - the above examples only demonstrated what is available on the owning side.

If you suspect that Tupperware's business is in decline, none of these agreements are going to look attractive. However, if you believe that there is potential in the business, the current valuation proposition might look interesting; especially from the income side.

You could simply own shares outright and collect a 5% ongoing yield. Alternatively, you could own shares and agree to potentially sell at a higher price - generating a very solid "income boost." Something to the tune of 1% to 7% in "extra" income over the course of the next one to seven months, or else agreeing to sell at a slightly to materially higher price.

Naturally, these sorts of things might not interest you if you have a much higher cost basis or plan to hold shares for decades, but I'd contend that having this information in the back of your mind is nonetheless useful. If not today, perhaps someday these sorts of agreements may be of interest.

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

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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