SMSF Investment StrategiesSharing Simple Strategies for Self Managed Super Funds
Why I am (still) buying Telstra
Today is expiration day for August 09 ASX Exchange Traded Options. By end of today, I will know if SLI Super would have become the owner of another 9360 Telstra shares. On 20 July 2009, I sold 9 contracts of Telstra 3.36 Aug09 put option for 0.15 per share. At the time of writing this post, Telstra shares are selling at 3.38. If it closes at 3.36 or less, my put options will be assigned and I will have to buy 9360 (9 contracts x 1040 shares per contract) shares at a price of 3.36 per share.
Some of you reading this may be laughing to yourself and saying “What a loser!” – why is she buying boring old Telstra when there are so many other high flying stocks that have rallied 40-50% since Mar 09? The way I figure this is if I the put options get assigned, I will be buying Telstra shares at $3.21 ($3.36 – 0.15 of option premium). Telstra has been faithfully paying 0.28 cents of dividends in the past few years, even during the economic downturn in the past 2 years. This equates to a yield of 8.72% per annum. However, because this dividend is fully franked, I should get another 15% tax rebate on my franking credits because my SMSF tax rate is only 15%. This should bump my yield up to 10%, just from dividends alone. As my target return for my SMSF is 8% p.a. after tax, this investment already meets my target return even if Telstra shares do not go up in price. I don’t need to hope for Telstra’s price to go up to meet my investment target. Any future capital gains will simply be icing on the cake. On top of the dividend payments, I can always sell some call options to further boost income on these shares if I like. I will probably do that if Telstra shares rally back up to previous high of 3.70 before its price took hit due to the Future Fund selling their 2 billion shares.
Prior to selling my put options, I also did my due diligence to check if $3.36 was a fair price to pay for Telstra. As I am not particularly good at interpreting financial statements, I subscribe to a stock valuation service that I trust. They conservatively valued Telstra at $3.48 in July 09 when I sold my puts, and the valuation has since be revised upwards to $3.74 after Telstra’s recent earnings report. When I looked at the Telstra price chart, I could see that Telstra was on a gentle uptrend, which I like to see as these moves are a lot more sustainable that sharp parabolic increases based on market sentiment rather than real fundamentals. Telstra business is recession proof so I am not too worried if this “recovery” turns into a double dip recession next year.
It is getting close to market closing time and Telstra is still trading above $3.36. Perhaps my put options will expire worthless. This means the $31,500 cash I had put aside for 39 days (from 20/7 to 27/8) to secure this put would have generated me an annualised return of around 45% (41% from the put option premium and another 3.75% from Comsec’s high interest account). Comsec did not require me to provide any cash margin because we had 1500 Telstra shares which they used as collateral. I guess I would not be too unhappy if this happens. I can do this all over again tomorrow by selling some more puts on good old Telstra.
So really, this is a lot like the tortoise and the hare. I may look like a tortoise now, but I may win the race in the end. With compounding at an annual rate of 10%, my money will double in less than 8 years. That’s good enough for me.
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