AT&T Option Trade, Locking In Premium (NYSE:T)

Written by Nick Ackerman. This article was originally published to members of Cash Builder Opportunities on July 9th, 2022.

With another options expiration coming and going, we’ve locked in some more options premium on AT&T (NYSE:T). As I’ve mentioned previously, AT&T (and Verizon (VZ)) are often great stocks to utilize a strategy of writing options. Generally, they aren’t too volatile, but they pay some healthy dividend yields if assigned. So while you wait to sell more options, you are still collecting a dividend.

That being said, 2022 has been quite volatile overall. AT&T was going through its transition of spinning off Warner Bros. Discovery (WBD), then right-sizing its dividend to pay down debt and factoring in the spin-off. That’s all added pressure on this telecom giant’s shares and helped provide a bit more juice to the premiums collected for selling options.

As we noted last time, despite the dividend being adjusted lower after years of being a dividend grower, the stock is still a higher-yielding stock. It hasn’t been all that long since our last commentary on the stock. The latest yield comes to a similar 5.34% at this time.

The dividend yield for AT&T, despite the large cut, still comes to 5.21%. The dividend went from $0.52 a quarter to $0.2775. That’s certainly much larger than most of the other S&P 500 Index components, still making it an attractive income play.

On the downside, it doesn’t seem that they are committed to growing the dividend going forward. They are going to be a “dividend competitor.” Here is what John Stankey had to say when pressed by an analyst asking if they will be a dividend yielder or a dividend grower.

I think we’re a dividend competitor moving forward, meaning I want the dividend to remain at a competitive level relative to others out in the market, which means I’ll pay attention to the yield of the dividend…

…we’ll pay attention to the yield, but I don’t necessarily intend to every quarter look at it and say my expectation is that I have to grow the dividend in any given quarter relative to not answering the question of how do we stand competitively in the market and whether or not we think we’ve got the right kind of mix of how we’re investing our capital and deploying it within the business.

At this competitive yield, though, is it really necessary to grow it every year? Probably not. If they can invest the capital back into the business and grow that instead, investors can be rewarded with a potentially higher share price. The dividend growth would probably come more naturally that way down the road.

Analysts expect that AT&T will provide EPS of $2.56 for 2022. That would be a sharp decline year-over-year due to adjusting for the spin-off. They also anticipate that earnings will be essentially flat heading into 2023. That is before heading slightly higher for the following years.

There just aren’t a lot of high expectations for growth from AT&T. That isn’t too surprising, though, as they operate in a slow-growing business. Even declining business as competitors chip away at their customers. It has become a very heated space. While T has actually been raising their charges and fees – competitors have been cutting costs.

Despite this, they still added a significant number of new postpaid, prepaid and fiber customers in the first quarter. The first quarter saw an EPS of $0.77. They are set to announce their Q2 results later this month, on the 21st. Analysts expect EPS to come in at $0.62 and revenue to come in at $29.48 billion.

So while analysts expect minimal growth, getting any growth could be seen as a positive. Additionally, these lower expectations set them up for the potential to surprise to the upside, which they tend to do.

I wouldn’t expect the dividend to grow rapidly going forward, as it wasn’t growing rapidly previously either. Given the comments in the last earnings call, we know they don’t seem to place a priority on growing the dividend anymore. With that being said, it also seems that given the earning expectations, they shouldn’t be cutting anytime soon either. They have enough room to maintain the current dividend even if we are in a recession or about to be in a recession.

The Trade

The latest trade was entered on June 10th, 2022. We sold puts at a $20 strike with the July 8th, 2022 expiration. We collected $0.32, and we locked in the entire amount by letting the option expire worthless. This worked out to a period of 28 days, putting the potential annualized return if we could do this same trade every 28 days at 20.86%.

The dividend equivalent works out to 1.15x the quarterly $0.2775. Of course, that is paid every ~90 days. We accomplished this in a February’s worth of days.

The market overall spent the first half of June heading lower. That isn’t surprising, given that’s been the market trajectory through most of this year. After about mid-month, we started making some of a recovery.

That’s mostly the same trajectory that AT&T followed over the duration of the trade too. Except, the shares recovered everything they had lost earlier in the month. Shortly after entering the trade, shares dropped below the $20 strike before rapidly recovering.

In total, this was the tenth trade that we’ve competed with AT&T. At one point, we had taken an assignment of shares and were writing calls. We have collected a total of $2.55 in option premium. The first time we sold puts on AT&T was on September 1st, 2022.

Meaning we’ve collected significantly more than the dividends paid out in that time. Through this series of trades, we even locked in that last lucrative $0.52 dividend as well. That was when the stock went ex-div on January 7th. We had those shares ultimately called away on January 14th, but since we held through the ex-div date, we received the payout on February 1st.

What’s Next?

One of the reasons to have the latest options trade expire before the earnings were to give us an opportunity to see how things were looking heading into earnings. There is only one more options expiration date before the earnings are released on the 21st.

Interestingly, despite the earnings announcement coming up, the option premium isn’t too elevated at this time. This would suggest that options traders don’t expect a lot of volatility when they announce their results. Additionally, AT&T was heading in an uptrend, which could also be reducing the options premium here.

An example of this is the August 5th, 2022, expiration date at the $20 strike is 27 days out. Quite similar to the same trade we just placed. The share price of AT&T is currently right around the same price it was in our previous trade too.

Although, when the markets open on Monday, it’ll be 25 days out. For that trade, one could collect $0.31 in premium. That was the last bid, and things could change when the market opens up next. This is a penny less than what we had collected with this previous trade. Given that, the potential annualized return would come in at 22.63%.

AT&T hasn’t historically been too volatile when they release their earnings. Given the latest closing price, it would only take a decline of around 3.85% to hit a $20 strike.

Going out a bit further to the August 19th, 2022 expiration, one could collect $0.42. That would be over 39 days, bringing the potential annualized return to 19.65%. August 19th is a normal monthly options expiration date, not a weekly one. There is considerably more volume, but even the weekly options for AT&T have sufficient volume.

Going out further would allow more time for the stock to recover if they announce poor earnings and it sells off. On the other hand, it also extends out the amount of time you have capital locked up. In this case, it also isn’t being compensated higher for that either.

These are two trades that I would potentially be looking at taking next. Where we open up on Monday will give us a better idea of what could be possible for the next move.