You know how a picture is worth 1,000 words? Well here’s why Coke (KO) is a great stock to own in troubled times:
What else do you generally expect to have at your fingertips ANYWHERE on the planet Earth? That’s because KO doesn’t sell snacks or even merchandise – they sell drinks and they sell them everywhere to everyone. I interviewed KO’s ex-CEO Muhtar Kent back in 2010 and I don’t know James Quincey but not too much has changed in a dozen years.
The company has divested a lot of its bottling operations to concentrate more on the core concentrate production and brand-building. They’ve acquired all or part of Costa Coffee, Honest Tea, ZICO Coconut Water, Fairlife Milk, Topo Chico Hard Seltzer, and BodyArmor and launched Coca-Cola Energy, Coca-Cola Plus Coffee, Powerade Ultra and Powerade Power Water.
As you can see, the stock is up over 100% from $30 (there was a split in 2012) when I did that interview and in 2035 it will very likely be at $130 but the nice thing is it will be Despacito (slowly) and that makes it a fantastic stock for our Income Portfolio, which seeks to generate a 2% quarterly income from our holdings while still growing the principle.
KO pays a $1.84 dividend, which is about 3% of $64 but we can do better by NOT buying the stock and taking the following spread:
-
- Sell 5 KO 2025 $60 puts for $3.75 ($1,875)
- Buy 15 KO 2025 $60 calls for $9 ($13,500)
- Sell 10 KO 2025 $72.50 calls for $2.80 ($2,800)
- Sell 10 KO July $65 calls for $1.45 ($1,450)
That net $7,375 on the $18,750 spread that’s $6,000 in the money to start. The upside potential is $11,375 (154%) at $72.50 or higher and, if KO doesn’t leap higher (not likely) then we can collect $1,450 per quarter for 6 quarters while we wait and that’s $8,700 – more than we paid for the spread!
More importantly, it’s 19.66% back on our $7,375, which is miles over our 2% goal in a very conservative trade with a low chance of failure. The 5 short puts obligate us to buy 500 shares of KO at $60 ($30,000) but that only uses $3,746.43 of Portfolio Margin – so not worth worrying about. In an IRA account, simply don’t sell the short puts and pay $1,875 more for the spread – it still works out great.
Those are the kinds of trades we’ll be adding to our Income Portfolio. While we will have Portfolio Margin in that account we’ll still consider a trade like that to be using a $15,000 allocation, roughly 10% of our $150,000 total. So let’s say we have 10 of those positions and we’re netting $7,000 per quarter from our various activities. That’s going to be almost 20% per year in options sales alone. If, 2 years from now, KO is up 20% at $77, we will have doubled our money AND our quarterly returns should double as well.
You can see how quickly these things build up….