How Owners of AT&T, Verizon, T-Mobile Can Use Covered Calls, Dividends To Offset Losses Update #1
Small and large dividend stock investors can use covered calls and puts trades to generate monthly income from options premiums and options trading.
By Donald E. L. Johnson
Cautious Speculator
Since The Wall Street Journal published its series of stories about telecoms’ abandoned lead sheathed cables, their prices have settled at lower levels and most appear to be sinking.
AT&T, Verizon and other companies are investigating the need to remove the cables and the risks and cost of launching major cleanup operations.
Cautious speculators and long-time owners of the stocks are focused on collecting the companies’ high dividends while they wait for the companies to decide what they will do about the abandoned cables.
Covered calls options traders can enhance their dividends by selling calls at the money or out of the money, depending on their risk tolerance.
AT&T Inc. (T), Verizon Communications Inc. (VZ), T-Mobile US (TMUS) and other telecom stocks tanked on July 17 after The Wall Street Journal reported that T’s and VZ’s abandoned lead sheathed cables are putting the lives of untold numbers of Americans at risk.
Since then, T and VZ and have rallied, but they’re still 100% sells at Barchart.com even though their prices are much lower than they were before the Journal published its series of stories about the problem. TMUS is an 80% sell even though it apparently doesn’t own any of the abandoned cables. Frontier Communications Parent Inc. (FYBR) is a 64% sell at the moment.
The average rating by analysts on T is a moderate buy, or a 3.72 out of a possible 5 rating. VZ is rated at 3.39. TMUS gets a strong buy rating at 4.75.
T has 564.17 thousand followers on SeekingAlpha.com. VZ has 352.84 thousand followers and TMUS has 66.27 thousand followers.
On SeekingAlfpha.com, contributors are split on T. They seem to be more positive about VZ.
Cisco Systems Inc. (CSCO), Motorola Solutions (MSI) and Qualcomm Inc. (QCOM) are buys on the Barchart rating system. While they supply the telecoms, their other businesses are doing well enough to keep investors bullish on them.
Fourteen of the 17 stocks are down from where they were 52 weeks ago.
T is trading at a very low 2.78 times cash flow. That shows how bearish investors are on the company and the industry.
VZ’s P/CF is a low 3.61.
TMUS’s P/CF is a still depressed 10.52, but it’s much better than T’s and VZ’s.
Price to free cash flow is an even better valuation metric than P/CF or the PE and PEG ratios. TMU has a very high P/FCF ratio of 43.4 compared with T’s 5.7 and VZ’s 11.2. That shows that investors think T-Mobile’s earnings will be much better than earnings at its major competitors, T and VZ.
At this point, the companies are investigating the risks involved in leaving lead sheathed cables in the ground, in waterways and hanging over public areas. They say it will take several weeks to complete their studies. What is interesting is that I haven’t seen a Wall Street Journal editorial about the lead sheathed cables. Politicians also have been relatively quiet about the issue.
While most of the telecoms’ stock prices have rallied below their recent lows, most also are sinking again and are below recent highs. Obviously, a lot of telecom investors have taken losses and profits on the stocks and won’t get back into them until their stocks start to rally.
T is trading at $14.05, down from a 52-week high of $20.50 and up from a 52-week low of $13.43. Owners of T who are ready to sell but would like to get a slightly higher price than they will get with the stock at $14.05 could sell T 8.18.23 $14 strike covered calls for about $0.28. That would give them an annualized return on risk of about 40% if the stock closes below $14 on Aug. 18.
The options market is saying that at best, by Aug. 18, T’s stock might be over $14.50.
Covered calls traders who are willing to sell at $14.50 plus $0.09 in options premiums could sell T 8.18.23 $14.50 strike covered calls for nine cents. That would give them a 16.55 ARoR. The delta on the $14.50 strike is 0.25. Thus, there is about a 25% probability that T will close above $14.50 on Aug. 18.
VZ is trading at $32.84, down from its 52-week high of $46.05 and up from its 52-week low of $31.25.
Traders could sell VZ 8.18.23 $33 strike calls for about $0.47 a share on a 100-share options contract. The ARoR would be about 35.6%. There is about a 45% probability that VZ will close above $33 and be called on Aug. 18. The out of the money probability is about 56.4%.
VZ owners who are willing to sell the stock but want a higher price could sell VZ 8.18.23 (14 days) $35 strike covered calls for five or six cents a share. That would give them about a 4% ARoR to go along with the current 7.95% annual dividend. There is only about an 8% probability that the stock will be called at $35.
TMUS is trading at $136, down from a 52-week high of $154.38 and up from a 52-week low of $124.92. T-Mobile owners and buyers could get about a 31.92% ARoR by selling TMUS 8.18.23 $137 strike covered calls for about $1.74 a share. There is about a 46% chance that TMUS will be called at $137.
Or traders could sell TMUS 8.18.23 $143 calls at about $0.29 a share for a 5.28% ARoR. TMUS doesn’t pay a dividend. The probability that TMUS will be called at $143 is about 8%.
I don’t have any positions in telecoms, but I own CSCO and have sold its covered calls.
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Jim Cramer says don't buy VZ for the dividend. He thinks it is going nowhere. https://www.cnbc.com/2023/08/01/cramers-lightning-round-verizon-is-going-nowhere.html