Disney: Looks A Lot Better With A Synthetic Dividend

Synthetic dividend can seem like quite an ominous term that might make you blush and fill you with anxiety. There's ample reason to fear the derivatives necessary to achieve, you might find no other way to travel after using one.

With ample thoughtfulness and thorough consideration, conservative investors have much to gain through the reasoned and disciplined use of derivatives. It is one of the primary ways to achieve alpha over your competition without adding the usually copious amounts of risk required to achieve that end without sophisticated financial tools.

Quant Scorecard

Seeking Alph

Disney $Walt Disney(DIS)$ is a cherished American company with a brand that has a special place in the hearts of billions.

If you pair this with a synthetic dividend you create through the use of covered call options, you are actually getting an even better deal than if the company was paying a dividend. Economically speaking, you are getting an effective dividend, but it is superior to a real dividend since the payout ratio is zero. This means you get a cash flow without the company needing to divert cash flow away from investing, which is good in Disney's case since its cash flow per share has fallen over the past five years, as you can see above.

Financial Effectiveness

TD Ameritrade

The firm has solid long-term assets, but it's hard to capitalize on that without compounding. I don't want to be exposed to these risks outright, but if I'm compounding by reinvesting my synthetic dividend, I am making those risks work for me in the long term. There are significant headwinds and challenges for this company. A synthetic dividend mitigates risk.

DIS Composition

ThinkOrSwim

You could also use the wheel strategy if you have a lot of cash in your account. This is a bit more complex, and instead of avoiding assignment, you use the cash after you are assigned to write cash-covered puts, either collecting the premium or getting put the shares and writing more covered calls.

Either a straight-covered call strategy works or a wheel strategy. Regardless of which strategy you use, the important thing is that you reinvest the proceeds in Disney stock. This way, any further weakness becomes an opportunity instead of a headache.

Conclusion

Just because a stock's near and medium-term risk outlook is muddled or negative doesn't mean you have to miss out on long-term value. Disney has its fair share of problems but is also very undervalued and is making a massive investment that could pay off.

Disney Valuation Summary

ValueInvesting.io

SOURCE: SEEKINGALPHA