Another CAT Call Worth Consideration

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Includes: CAT
by: The Money Madam
Summary

My theory is that CAT is more facile with its business operations than the average investor thinks.

CAT has a rather large debt to equity ratio (D/E) at just over 2 but that is within industry standard.

The fact that I write a lot about CAT and execute these calls is evidence that CAT is a good stock to hold over time and work it for income.

Yes, I still own some Caterpillar (NYSE:CAT). It has been an interesting ride on this big yellow money machine.

Revenues peaked in 2012 then precipitously fell in response to global slowing. My readers know I like stocks that fill the funnel with revenues which lead to earnings and dividend payouts. Therefore, it is odd when I add a stock with a suspect revenue history.

My theory is that CAT is more facile with its business operations than the average investor thinks. It has been able to raise dividends because it manages its earnings well. Lay that management execution over the improvement in business activity and we have the foundations for continued dividend payouts and dividend growth.

CAT has a rather large debt to equity ratio (D/E) at just over 2 but that is within industry standard.

Caterpillar's fundamentals are listed below. Note the revenue trend has reversed and is growing. Its 2019 first-quarter revenue was an increase of 4.7% over first-quarter revenue in 2018. This is good news.

Yet, I am not so enamored with CAT that I am not willing to lose the shares I just added. With that in mind, I sold an immediate call on CAT. The table below presents the details of the covered call.

I added CAT at $128 Tuesday. I immediately sold a $140 August 16, 2019, call receiving a $1.55 call premium. The expiration date is after the next ex-dividend date of July 19, 2019, which means I should also bank the quarterly dividend. Add it all up and if it takes my new shares at $140 my return is 11.34% on those shares in less than 2 months.

If I end up keeping CAT, I just added the premium of $1.55 to CAT's income. With a full year of dividends and this one call, income from CAT adds up to $5.67 ($4.12 dividend + $1.55 call premium.) That, folks, is an income yield of 4.42%. Anything over 4% meets my target income goal.

The fact that I write a lot about CAT and execute these calls is evidence that CAT is a good stock to hold over time and work it for income.

M* MoneyMadam

Disclosure: Long CAT with calls.

Editor’s Note: The summary bullets for this article were chosen by Seeking Alpha editors.