With cicadas flying around every AI headline and index volatility skyrocketing, I’m looking for a way to counter that, a steady cash-generating business where I can sell volatility instead of buying drama.
Signa (CI) I would rather write my own path than chase stocks.
Cigna is not a coming-of-age story. Compared to the eye-popping numbers posted in the semi-finals, revenue growth has been modest but steady. The company reported and beat adjusted EPS of $7.79 in the first quarter, raising its full-year guidance to at least $30.35 per share and extending its multi-year pattern of adjusted EPS growth. This marks the fifth consecutive (albeit modest) quarterly EPS beat. The stock is also supported by a robust share buyback program. There is $2.5 billion left in the $6 billion buyback program announced early last year.
Since the stock price is just over $290, you are paying approximately 9.5 times future earnings. At current levels, the dividend yield is much less than S&P’s Turn 1 payout, which is roughly double that of 2.2%.
Cigna, YTD
If dividends are one of your reasons for buying the stock, you’ll have to wait until the first week of September to get the next dividend (CI goes ex-dividend on 9/4). Therefore, to accelerate your potential income, rather than buying out the stock at $290, you would sell the July $280 cash-secured put, which has recently traded around $6.
Transaction details:
Two things can happen, both of which are acceptable. If the CI remains above $280 until the expiration date, the premium will be maintained. If you agree to buy a company at a discount, with about 2% cash and 9.5 times earnings, which you can secure in about six weeks, the annualized yield would be in the mid-teens.
If CI is allocated below $280, our effective basis would be approximately $274, a 5% discount to the current price, and comfortably above the lower half of the 52-week range. From there, the second phase of the strategy begins. Collect dividends and systematically sell covered calls on your positions to turn your stable managed care franchise into a recurring revenue stream.
Like any trade, this one is not completely risk-free. Managed care comes with headline risks, health care cost trends, and other risks. But that’s exactly the point. We are allocated a price that we have already determined is reasonable to own.
And, of course, selling a put puts a lot of margin in your account, but the capital commitment is the same as simply buying a stock.
If volatility keeps showing up uninvited, getting rewarded for setting your own entries in low-volatility plays can act as a good balance to slow portfolio fluctuations.
