One of the worst names this year in the consumer discretionary space has been L Brands (LB - Get Report) . Gross. Earnings have been sloppy. The firm guided lower for the full year back in February. In May, they guided lower for fiscal 2019 as well. Debt-to-capital has crept higher as cash levels have gone lower. Profit margins have gone the wrong way, as well. Oh, the current ratio looks okay, but this is a retailer, a mall-based retailer. Strip out inventories and the quick ratio... not so hot.
In mid-July, the firm flat out told us that they had a lousy June.
One thing has not changed. Every quarter, these guys still pay their shareholders $0.60 per share. The dividend yield is now up to 7.5%. Is it safe? As long as free cash flow is there, and it seems to be, I think for management, the dividend will be a line in the sand. You have time... I think.
For our new traders, all that mean is that the trader buys an equity stake, and simultaneously sells (writes) covered calls against the position, thus reducing net basis costs. Profit is then obviously limited, but then again, the trader will have technically bought the shares "below the market."
How to Play It
--Purchase 100 shares of L Brands at or close to the pre-opening last sale of $31.99.
--Sell (write) 1 August 24 $34 call (last bid: $0.50).
At these prices, this reduces the trader's net entry point to $31.49, while limiting the short-term profit to $2.51. If the shares never make it to $34 by expiration, you'll still likely get paid the $0.60 dividend, further reducing net basis to $30.89.
Want to pay $30.89 for a stock that closed last night at 32.09? It takes patience. It takes work. It takes some finesse.
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