Edison Int'l Stock Has High Yield Call Options for Investors

Mark Hake

EIX stock attractive covered call plays on this Southern Cal utility stock

This is not financial advice and you should not rely on my analysis to buy or sell any stock. I am not undertaking to induce you to buy or sell any securities. I am relying on the “publisher’s exclusion” in the Investment Advisers Act of 1940 to provide this information without any personalized or individualized investment advice.

Edison International (EIX), a Southern California electric utility, has a very attractive covered call opportunity for investors. This article will explain how to play this. 

The utility stock provides a high dividend yield of about 4.0%. In addition, the one-month forward out-of-the-money covered calls offer about 1% call yields. That works out to 12% on an uncompounded annual basis. So, the total yield to investors using this strategy could be around 16%.

Covered calls tend to work well with stocks that are not going to bounce around a lot. In this case, we can determine that EIX stock is worth from 3 to 7% more. That puts its target value at around $73.00 per share.

For one, Morningstar recently wrote that an administrative law judge said EIX can recoup $384 million of higher-than-expected wildfire safety costs in 2018–20. That works out to 66% of the $584 million in net income it has made in the past 12 months, according to Seeking Alpha. That could raise its earnings by 13% on average over each of the next 5 years if the California Public Utilities Commission accepts this ruling. The Morningstar analyst said his valuation of the stock is $71, or 2% higher.

In addition, Morningstar has a table showing that the stock’s average dividend yield in the last 5 years was 3.90%. EIX’s dividend per share of $2.80, divided by 3.90%, produces a target price of $71.80 (i.e., $2.80/0.039). This is 3.2% over today’s price.

We can use this to set our covered call strike price.

Covered Call Opportunity

The Barchart table below shows that the July 15 calls with a strike price of $72.50 (close to the $71.80 target price), offer premiums at a mid-price of 70 cents.

If you think about this, this works out to 1% of the $69.72 price of EIX stock today. So, annualized without compounding, that works out to 12%. With compounding, it’s an ROI of 12.68%.

This is an attractive investment opportunity, especially as one might assume that the stock will not bounce around too much.

For example, even if the stock rises to $72.50 by July 15, the covered call investor will be able to sell his 100 shares per option at $72.50. That is 4% over today’s price of $69.72. So, in one month, the investor will have made 5% (i.e., 4% capital gain, plus a 1% covered call gain). In addition, the investor may be able to keep any dividends that have been issued.

One downside is that if the stock falls, the investor cannot sell his shares without first exiting the covered call sale. In addition, if the stock rises significantly over the $72.50 strike price by July 15, the investor might miss out on a higher sale price.

Nevertheless, this call option has 39 days before closing. Investors have a reasonably high chance that this opportunity will work out. Typically, call prices decline in value during their last 30 days outstanding, which works out to the benefit of covered call investors.

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Mark Hake writes articles on InvestorPlace.com, Barchart.com, Medium.com, and Newsbreak.com as well as a Beehiiv free newsletter on stocks and cryptos.

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Mark Hake is a financial analyst, investor, and Chartered Financial Analyst (CFA). He writes about US and foreign stocks as well as cryptos, hedge funds, and private equity. He previously ran his own hedge fund, investment research firm, and acted as CFO for a fintech startup. He focuses on finding value, arbitrage, and hidden asset opportunities.

Phoenix, AZ
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