Recently I have put out two pieces on Dividend Aristocrat apparel firm V.F. Corp (NYSE:VFC) - think brands like the North Face, Timberland, Vans, Lee and Wrangler. The first detailed what we could learn from the company's "expensive" past. In a sentence, the business has performed well but the share price increased much faster for a time, leading to underperformance in the last few years.
You had a security that usually trades in the mid-teens jump all the way up to 24 times earnings by 2014. In the last few years the business has been incrementally improving, while the valuation has been "burning off" - to the tune of a near 30% decrease in share price over the last two years.
This disconnect has led many to wonder if the security now looks interesting. That's what the second piece was about: "would you consider V.F. Corp today?"
Naturally the answer to this question depends on your view of the business and your alternatives. My conclusion was that I felt the "quality" of the holding was above average (solid financials, good pricing power, but perhaps uncertain "staying power") coupled with a reasonable, but perhaps not yet "compelling" valuation. As a back of the envelope calculation, something in the 5% to 8% range for average compound anticipated gains seemed reasonable.
Now whether or not this appears attractive depends on your viewpoint. If you don't believe in the company, not many prices are going to look interesting. Alternatively, if you do believe in the company, there's a follow up question you have to ask: "is today's price fair or should I demand a lower one?"
For many, today's price is deemed as fair and they have begun or continued accumulating shares. For others, they want to see a bit lower price to get interested, with many indicating the psychological $50 mark as a starting place.
Let's imagine you're in the second camp for the moment. You think V.F. Corp is a fine business, but you'd prefer to partner with the firm at a lower price.
You have some alternatives available to you. For one thing, you could simply wait and see what happens. For another, you could set a limit order and again see what happens. Or, if you're truly willing to buy at a certain price or below, you could make that sentiment known and get paid - regardless of the outcome - for doing so.
Here's a look at some available put options for V.F. Corp for the August 2017 strike price:
Note that I have no special preference for this expiration date (many prefer shorter time periods and usually I'll use a longer illustration for examples) but it does give you an idea of what is out there. What you see above are the types of agreements you could make for the next seven months.
The first column indicates the strike price, or the price at which you would be agreeing to potentially buy at least 100 shares of V.F. Corp. The second column indicates the net premium that you would receive, which takes the most recent bid less $0.15 per share for frictional expenses.
The third column indicates the yield that this would represent based on the capital required to "cash secure" the agreement. The discount column details how much lower your cost basis would be, in comparison to the current price, should the option be exercised.
The fifth and sixth columns indicated the P/E ratio and starting dividend yield that those agreements would represent if the option is exercised. So you can think about columns one and two as the "offers." Column three is the benefit if the option is not exercised. And columns four through six indicate the terms if the option is exercised.
Let's go through an example. Suppose you're not particularly enthused to buy shares at today's price, but you'd be more interested should the price be ~15% lower. We once again have the three alternatives. You could wait and see what happens. You could set a limit order for ~$45.50. Or you could make an agreement and get paid upfront regardless.
So as an illustration, you could sell the $47.50 put option for V.F. Corp and receive ~$195 in option proceeds (which may be taxed differently than dividends) upfront. Once you make the agreement one of two basic things occur: either the option is exercised or it is not.
If the option is not exercised, your ~$4,750 is released and available to be redeployed once more. The bad news is that you do not yet own shares in a business you'd be happy to partner with. The good news is that you did generate a 4% return for making your willingness known. This may or may not turn out to be better than the "wait and see" or limit order alternatives, depending on if you could find other productive uses of the capital in the interim.
If the option is exercised, you'd now own 100 shares at a cost basis of ~$45.50 per share. This is true even if shares "only" drop to $47 or if they go below $40. If the price is under $47.50 at expiration (or is exercised beforehand) that will be your cost basis.
If you're happy to hold, this is fine circumstance. Regardless of the short-term performance, you'd now own 100 shares in a business you're happy to partner with at a significantly lower price. Your starting valuation would be under 15 times earnings with a 3.7% dividend cash flow component. And that's in addition to the ~$195 that you received upfront.
In short, V.F. Corp has proven itself to be a fine business over the years. The price has come down materially in the last couple of years, creating interest for many investors. Some are still looking for a bit lower valuation. You could wait and see what happens, or you could get paid to make your sentiment known.
The point is not necessarily to encourage this - the attractiveness of option agreements will depend on willingness and alternative investment possibilities - but instead to highlight it as an intermediate step that is available to you. You're not limited to either "buy" or "wait." Instead, you can get paid to agree to buy at a price you deem fair.
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.