NetApp (NTAP): 63.25; 3.13% Yield
We started this position nearly two weeks ago selling a put on NTAP. Here is the follow-up review of the stock and ongoing trade position.
Note: We are buying the stock today before the April 5 ex-dividend date.
The Company
NetApp provides cloud-led and data services to manage and share data on site and in both private and public clouds. The company provides system, software and cloud services to let clients run applications from a data center to the cloud. Its All Flash FAS systems are right in the middle one of the hottest markets in data storage.
While in a competitive market, the company is well-managed and has enjoyed a number of early-mover advantages in the cloud space. NetApp’s forward P/E is less than 12, and the company has continued to improve profit margins year over year. Recently, like other tech firms, it reduced its headcount by 8% while continuing to generate plenty of free cash flow.
The Stock
NTAP stock got punished along with the entire tech sector last year, falling from a high of around $96 in January 2022 to a low just above $58 in December. During that time, the company delivered on profits, beating earnings estimates in each of the past quarters. Sales slowed in Q3 and one analyst downgraded NTAP
But the stock has climbed about 9% from its lows. It has been trading in the $60 to $65 range for the past few months. While we don’t see explosive growth in the stock price in the next few months, we don’t mind selling options on the stock while it trades in a tight channel.
The Dividend
Many tech companies are unreliable when it comes to sustaining dividend payments. NTAP, on the other hand, like IBM (IBM), has prioritized shareholder value. The company has very little debt and plenty of free cash flow to cover its dividend in the coming year. And it has increased its payout for the past nine years.
Options
NTAP has weekly options with decent liquidity. Lately, implied volatility in the options has dropped as traders see the company as a more stable play rather than a momentum tech stock. We will see elevated premiums around earnings dates and expect that we can collect 20% to 25% in cash each year.
Dividend Profile:
Annual Dividend: $2
Effective Annual Yield: 3.13%
5-Year Dividend CAGR: 20.41%
Consecutive Years of Dividend Increases: 9
Earnings Payout Ratio: 36.56%
Cash Payout Ratio: 20.63%
Ex-Dividend Date: April 5, 2023
Dividend Date of Record: April 6, 2023
Payout Date: April 26, 2023
Dividend Frequency: Quarterly
Stock Profile:
Last Price: 63.25
P/E Ratio: 11.2
2022 Estimated EPS: 5.41
Market Cap: 13.5 billion
Next Earnings Report: TBD
Sector: Technology (Data storage, on-premise and public clouds)
Trade Review:
- We started collecting income when we sold the 61.50 put for 1.15.
- The stock is trading at around 63. We will buy shares at market and sell a 64 call for a credit.
Trade Details:
Stock Price: 63.25
Trade: Buy stock at market and sell the 14 Apr 64 call
Estimated Credit: 0.50 to 0.52
Probability of Out of the Money (OTM): 64.07%
Days to Expiration (DTE): 10
Capital per one contract: $6,325
Cost Basis: $62.74
Risk: Stock retraces and we have to roll our call position out further.
ACTION: Buy NTAP stock at market and sell to open NTAP 14 Apr 64 call for a net credit of around 0.50 to 0.55