Stock Options To The Rescue! Colgate-Palmolive (CL)

| October 26, 2012 | 0 Comments

CL OptionsToday we’re going to look at Colgate-Palmolive (CL) and how you can use options to generate some additional income, reduce your cost basis, and profit from the recent decline in the stock.

Here’s what happened…

Colgate-Palmolive shares fell 3% from $106.56 to a low of $103.05 after reporting 3rd quarter earnings earlier this week.  They met Wall Street earnings estimates but fell short of revenue estimates and announced they will cut 6% of their workforce by 2016. 

Here’s the deal…

The world’s largest toothpaste maker reported net income increased 1.7% to $654 million last quarter.  The $1.38 EPS met Wall Street expectations.

However, revenue fell 1.2% to $4.33 billion as sales slumped 11% in Europe and the South Pacific.  They fell short of the $4.38 billion in sales analysts were expecting.

Here’s the kicker…

CL is struggling to grow their business and maintain profit margins as the global economy weakens.  So, they’re cutting costs by restructuring their business.

In other words, the company’s slashing their global workforce by 6% or about 2,300 over the next four years.  The job cuts are expected to save the company $365 million to $435 million per year.

But the benefits won’t be felt until four years from now!  What’s more, the company doesn’t have a plan to revive slumping sales!

What’s going to happen to the stock between now and when the cost savings kick in?

At this point, CL will have a hard time living up to sales and earnings growth expectations.

That means this safe and secure consumer staples stock will likely have a hard time moving higher from here.  But since it pays a solid $2.48 dividend every year, it likely won’t come crashing down either.

Here’s what to do now…

Let’s assume you invested $10,700 to buy 100 shares of CL at $107 before earnings.  At this point, you’re down about 3% on the trade.  But there’s no reason to panic. 

Remember, CL pays a solid dividend that’s not at risk.  And many investors have been attracted to the stock so they can collect those payouts.

The combination of slowing sales and a solid dividend should keep the share price in range of $95 to $105 for the foreseeable future.  Selling the CL May 2013 $105 covered call will increase the cash you can generate from holding onto the stock. 

Right now you can sell the May 2013 $105 call for $4.70.  So you collect $470 in option premium as the seller.  And you still own 100 shares of CL.

There are two possible outcomes for this trade…

First, if CL is above the $105 strike price, the option holder will exercise their right to buy your stock at $105 per share.  So, your 100 shares will be called away or sold for $10,500.

But that’s just fine… you bought the stock for $10,700.  So you’re realizing a small $200 loss on the sale of the stock.  But you get to keep the $470 in option premium and $124 in dividends.  Your total profits are $394 or about 3.5%.  

However, a more likely scenario is CL never reaches $105. 

If CL stays below $105 until May options expiration, the option will expire worthless.  You’ll get to keep the $470 in option premium, the $124 in dividends, and you’ll still own the stock. 

You can continue to hold the stock and collect the dividends and participate on any upside.  What’s more, you can sell another call option against your shares and generate even more income.

In my opinion, the recent developments in CL give us an opportunity to sell a covered call and increase the amount of income you can generate off of this high yielding dividend stock.

Good Investing,

Corey Williams

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Category: Stock Options To The Rescue!

About the Author ()

A former banking executive, Corey Williams is the Chief Options Strategist and co-editor of our well-known daily newsletter, Options Trading Research. Corey’s extensive experience with options goes all the way back to his days in corporate finance. It was this decade in banking where Corey discovered the most important skill an options trader can have– the ability to analyze a company or sector to determine its likely future direction. And now he’s brought this background, experience and love of options to Options Trading Research, the unique daily e-letter devoted exclusively to helping individual investors profit from the very lucrative options market.