Keeping Our Income Strategy Rolling
Mar 12th 2013 1:38PM
Updated Mar 12th 2013 1:42PM
When we wrote puts on ArcelorMittal back in September, we were aiming to receive income or secure a lower stock price should the puts be exercised. As of yesterday's close, we'd gained about 46% of the profit available on our March $16 puts. Since then, the world's largest steelmaker has hit some bumps in the road.
Steel has already been a challenged industry because of the oversupply in the markets, but business took a slight turn for the worse in 2012. Thanks to worse-than-expected performance out of Europe, ArcelorMittal's steel shipments declined 2.3% for 2012, coupled with an 8.2% decrease in average selling prices. As a result, the company has performed worse than previously forecast.
Looking ahead to 2013, there are a few reasons to expect things to improve from here. First off, the company has been carrying out its plan to reduce its net debt in order to maintain its investment grade rating. Along those lines, management continues to pursue asset sales and is cutting back capital expenditures on non-core projects, only planning to grow key projects such as its mining projects. The company expects to reduce its net debt to $17 billion by mid-year and to $15 billion in the medium-term.
However, as part of this focus on costs and preserving cash, the company also has cut its dividend from $0.75 annually to $0.20. Management plans to raise the dividend once it's done shoring up its balance sheet. Until business improves materially and the dividend starts to increase again, investors are not likely to bid up the company's shares just yet.
ArcelorMittal expects to see an increase in global apparent steel usage by 3% in 2013. The company expects activity to continue picking up, but at a slow pace. Until then, we should expect the company to continue cutting costs and only focusing on its lowest-cost operations. The company remains a good way to play long-term economic rebound, though we're still not close to a sustained upturn just yet.
Foolish bottom line
Our March puts expire on Friday, so we're looking to extend our income strategy by rolling our puts to June. According to the most recent bid/ask spread, we can roll our strategy out three months for a net credit of $0.65 , or 4.1%. Tomorrow, I'll be buying to close our current March $16 puts and selling to open new June $16 puts for the Street Fighter Portfolio, which I co-manage with Matt Argersinger.
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The article Keeping Our Income Strategy Rolling originally appeared on Fool.com.Paul Chi has no position in any stocks mentioned. The Motley Fool owns shares of ArcelorMittal. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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