3 Dividend Stocks With Low PEG Ratios and High Put Option Yields

Posted on August 28, 2010

By Robert Hauver

Our latest screen for dividend paying stocks with low next-year PEG and 5-year PEG ratios, competitive management ratios, and conservative debt levels, has turned up 3 new dividend stocks with high put options yields: Autoliv (ALV), Gol Intelligent Airlines (GOL), and Illinois Tool Works (ILT). We’ve added ITW to the Industrials section of our High Dividend Stocks by Sectors tables this week.

Here are Dividend Yield, Management, Debt, and Profit Margin metrics for these 3 firms:

ALV-Mgt.

(Note: Although GOL’s Debt/equity ratio is over 1, it’s much lower than its Airline peers’ average of 2.37.)

This Valuation table lists both Next-year PEG and 5-year PEG ratios:

ALV-PEG

Here are selected Cash-Secured Put Option Yields:

We’ve added all 3 of these dividend stocks to our Cash Secured Puts table this week, where more details are listed. As you can see, the cash secured put option yields far outstrip the dividend yield for these stocks.

Company Profiles:

Autoliv (ALV): Sweden-based Autoliv enjoys a large share of the Automotive safety products market- airbags, seat belts, and safety electronics. This niche leads to more money because consumers demand safety equipment and automakers can charge higher prices for it. Autoliv has demonstrated technological leadership throughout its history: It introduced side-impact airbags, owns 7% of all automotive safety patents, and spends around 6% of sales on research and development.

Side-impact airbags are the fastest-growing product line in the market, and Autoliv has a 40% market share.

Expansion in the global auto market keeps demand high for Autoliv’s products. The global average of safety content per vehicle is $260, but this amount varies considerably in emerging markets. For example, China’s safety content per vehicle is just over $200 while India’s is only about $70. Consequently, Autoliv can expand in its core business significantly. (Source: Morningstar)

Q2 2010 revenue for the three months ending July 17th was up 7.2%, slightly ahead of the average $1.41 billion estimate, yielding an EPS of $1.16, well above the average $1.03 estimate.

ALV raised its 2010 profit outlook to a range of $3.70 to $3.80/share, up from a prior forecast of $3.34 to $3.54/share. The company cited both improved performance as well as “significant” share repurchases as reasons for the improved outlook. Analysts have been forecasting only $3.58/share in profit.

The firm purchased 3.4 million shares of its stock for $168 million during the quarter, about half the amount of shares repurchased in Q1.

Gol Intelligent Airlines (GOL): GOL and the airline industry should be huge beneficiaries of the massive infrastructure upgrade that is likely to occur during the coming decade, as the Brazilian government readies the country to host both the 2014 World Cup and the 2016 Summer Olympics.

Since its inception in 2001, Gol has increased its share of the Brazilian domestic market to slightly more than 40%. Introducing the low-cost business model—a la U.S.-based Southwest –has been the key to Gol’s success. Over the years, Gol has perfected this model and now possesses the lowest cost per available seat kilometer in the Brazilian industry. Although the firm continues to offer the same single-class service, it’s updating its fleet to an all-Boeing next-generation 737 model. The new fleet, which will be among the industry’s youngest, should continue to keep the firm’s operating expenses at bay. (Source: Morningstar)

Illinois Tool Works (ITW): A multi-billion dollar firm with over 100 years of history, ITW designs and manufactures fasteners and components, equipment and consumable systems and a variety of specialty products and equipment for customers around the world. Several ITW brands are leaders in their markets.

ITW is well-positioned to grow its business in Asia. In countries such as China and India, the company has heavy exposure to infrastructure projects in its welding and construction units. In fact, ITW has already doubled the percentage of revenue from the Asia-Pacific region since the beginning of the century. In 2010′s first quarter, ITW’s business was up 37%.

ITW is forecasting third quarter 2010 diluted income per share from continuing operations to be in a range of $0.72 to $0.84. The 2010 third quarter forecast assumes a total revenue growth range of 9 percent to 13 percent. For full-year 2010, the Company is forecasting diluted income per share from continuing operations to be in a range of $2.82 to $3.08. The 2010 full-year forecast assumes a total revenue growth range of 11% to 13%.

Disclosure: Author is short GOL puts.

Disclaimer: This article is for informational purposes only.

3 Large Cap Dividend Stocks With Attractive Options Yields And Low PEG Ratios

Posted on August 21, 2010

By Robert Hauver

We screened for large cap dividend stocks with low PEG ratios, 3%-plus dividend yields, and attractive options yields for both covered calls and cash secured put options. We’ve added them this week to our Covered Calls table and to our Cash Secured Puts table. These are short-term trades, (5-6 months), that should capitalize on the current low PEG ratios for next year for these 3 firms.

Conoco Philips (COP): A major integrated Oil & Gas co., (Basic Materials sector), COP’s revenues increased 42% to $95.89B for the six months ended 30 June 2010. Net income totaled $6.3B, up from $1.7B for the same period. (These figures include the sale of Syncrude). ConocoPhillips intends to sell the remaining 60% of its entire stake in Lukoil for $3.44 billion in 2011. (Source: Morningstar)

Eaton Corp. (ETN): An Industrial & Electrical Equipment firm, (Industrial Goods sector). Eaton Corporation’s revenues increased 13% to $6.48B for the six months ended 30 June 2010, and net income totaled $381M vs. a loss $21M year-over-year. Revenues reflect a rise in the income from Truck segment, the Automotive segment,the international Electrical segment, and higher sales from their Hydraulics segment. International sales have grown from 20% of the total in 2000 to 55% in 2009 (including 22% to developing markets, up from 8%). Eaton now serves a wide swath of industrial markets, including aerospace, energy, agriculture, and construction. (Source: Morningstar)

McGraw Hill (MHP): A major Publisher, (Services sector), MHP was founded in 1888, and is a member of the S&P Dividend Aristocrats, an elite group of firms who’ve increased their dividend every year for a minimum of the past 25 years. MHP’s revenues increased 2% to $2.66B for the six months ended 30 June 2010, and net income increased 30% to $294.4M. Revenues reflect an increase in income from Financial Services and higher income from McGraw-Hill education segment. McGraw-Hill’s branded information services include the likes of Standard & Poor’s, J.D. Power & Associates, Platts, Aviation Week, and McGraw-Hill Education. (Source: Morningstar)

All 3 of these dividend paying stocks have options trading strategies available. Considering the current wave of uncertain expectations descending upon the economy and the market, income investors looking for near-term income may want to consider selling covered calls or cash secured puts, both of which offer higher yields than these firms’ dividends.

(Note: Option yields below are annualized for ease of varying time-length comparison):

COP-ETN-MHP-Options

Here are the valuation comparisons:

COP-ETN-MHPVal2

Here are key efficiency and financial ratios:

COP-ETN-MHP-Effy

Conoco Philips is currently also listed in the Energy section our

High Dividend Stocks By Sector Tables.

Disclosure: No positions at this time.

Disclaimer: This article is for informational purposes only.

7 Dow Dividend Stocks With 10%-Plus Put Option Yields

Posted on August 14, 2010

By Robert Hauver

If this week’s downturn is making you jumpy, maybe you ought to think about taking advantage of the pullback, by selling cash secured put options on some Dow dividend paying stocks. Although these stocks wouldn’t be considered high dividend stocks, they do currently have very attractive put option yields, ranging from just below 10% to over 12% for a 5-6 month trade.

The pullback has increased the volatility and the bid prices on these put options, which benefits option sellers, AND achieves a lower break-even price. In fact, the put option bid yield far outstrips the dividend yield on all of these 7 Dow stocks:

COMPANY	SYMBOL	8/12/10 STOCK PRICE	PUT OPTION BID	PUT YIELD	ANNUALIZED PUT YIELD	DIVIDEND YIELD	EXPIRATION MONTH	PUT STRIKE PRICE	BREAK-EVEN PRICE
CATER-PILLAR	CAT	$67.59	$6.95	11.48%	25.87%	2.60%	11-Jan	$67.50	$60.55
JP Morgan Chase	JPM	$37.84	$3.65	10.78%	24.29%	0.60%	11-Jan	$37.50	$33.85
AMERICAN EXPRESS	AXP	$42.44	$4.00	10.53%	23.73%	1.70%	11-Jan	$42.00	$38.00
BANK OF AMERICA	BAC	$13.16	$1.42	12.26%	23.55%	0.30%	11-Feb	$13.00	$11.58
BOEING CO	BA	$64.95	$5.90	10.42%	20.02%	2.60%	11-Feb	$62.50	$56.60
Hewlett Packard	HPQ	$40.25	$3.65	10.04%	19.29%	0.80%	11-Feb	$40.00	$36.35
Home Depot Inc	HD	$27.60	$2.39	9.71%	18.65%	3.50%	11-Feb	$27.00	$24.61

Although its put yield is just below 10%, Home Depot is on this list due to its 3.5% dividend yield, the highest in this group. We’ve also added Home Depot to our Cash Secured Put Table this week, as it has an attractive 18%-plus put yield. However, as you can see from the table above, most of these Dow 30 dividend stocks don’t have very attractive dividend yields, which is another reason for income investors to consider selling cash secured puts on them instead.

The benefits of this strategy are 4-fold:

Immediate income – You receive the cash from put sales in your account within 3 days after the trade.
Much higher yields – This varies, of course, but in times of increased volatility, put yields often outpace dividend yields.
Lower breakeven – All of the above puts are “out of the money”, (put option strike price is below the stock price), which gives you a lower breakeven price, and more protection against a falling share price than owning the stock outright would.
Tax deferral – You don’t have to pay taxes on sold put options until they expire, or you close your position. Thus, if you hold any of the above puts until their Jan/Feb. 2011 expiration, you aren’t liable for taxes until the April 15, 2012 deadline for paying taxes on 2011 gains. In fact, if you’re assigned the underlying stock, you don’t have to pay taxes on the put money that you received until you sell the underlying assigned stock, since the IRS states that your tax basis for the assigned stock is lowered by the money you received for selling the put options. Quite a nice break for investors.

Caveats:

Short term tax rate – Option profits are taxed at short term rates, even if they’re held for more than 12 months, as opposed to the qualified dividend tax rate, which is now 15%, but may rise in 2011.
Selling vs. Buying options – Option sellers usually have to put up much more cash than option buyers, particularly when selling cash secured puts. Brokerages generally will require a “cash reserve”, equal to 100% of the cost of the underlying shares. If you have a 100% cash reserve requirement, your initial cash outlay for selling cash secured put options is similar to buying stocks, with one big difference: your cash outlay will be reduced by the premium $ you sell the options for, within 3 days. (Also, if you qualify for option level 3, your broker may reduce this reserve requirement to 25 -35%).

Disclosure: Author is short BAC puts.

Disclaimer: This article is written for informational purposes only.

The 3 Dividend Aristocrats With The Lowest PEG Ratios

Posted on August 6, 2010

By Robert Hauver

Looking for dividend paying stocks with undervalued earnings growth? We found the 3 Dividend Aristocrats stocks with the lowest PEG ratios: Cincinnati Financial, (CINF), Aflac, (AFL), and Chubb, (CB). CINF has the highest dividend yield of these 3 firms, currently paying 5.7%, and is listed in the Financials section of our High Dividend Stocks by Sector tables.

We compared these 3 stocks to the Dividend Aristocrats group, and to their Insurance industry peers.

Here’s the Dividend Aristocrats comparison:

Ticker	Price	P/E	PEG	P/S	P/B	P/Free Cash Flow	EPS growth this year
AVGS.		17.64	2.09	1.63	4.29	28.96	3.04%
CINF	$28.00	8.97	0.90	1.17	0.97	13.56	1.01%
AFL	$51.22	13.16	0.96	1.25	2.4	13.35	21.86%
CB	$53.55	8.07	0.97	1.26	1.11	8.57	25.74%
Ticker	EPS growth next year	EPS growth next 5 years	Dividend Yield	Return on Equity	Total Debt/Equity	Operating Margin	Profit Margin
AVGS.	10.46%	8.92%	3.18%	19.41%	1.17	42.54%	10.61%
CINF	34.27%	10.00%	5.70%	11.51%	0.18	18.05%	13.09%
AFL	9.71%	13.74%	2.20%	22.36%	0.26	14.37%	9.55%
CB	5.44%	8.33%	2.80%	15.61%	0.25	23.78%	17.24%

CINF and CB both fare well vs. their Property & Casualty Insurance Industry peer group:

	CINF	CB	INDUSTRY AVG.
Dividend Yield	5.70%	2.80%	2.58%
P/E	9.01	8.07	13.19
Price/Free Cash/Share	6.37	8.57	13.94
Total Debt/Equity	.17	0.25	.24
PEG(Next 5 years)	.90	.97	1.06
ROE (TTM)	11.51%	15.61%	11.37%
Operating Margin (TTM)	18.05%	23.78%	13.43%
EPS Growth Rate Next 5 Years	10.00%	8.33%	9.67%
Price/Book (MRQ)	.95	1.11	1.71

(There’s additional info on CINF in our August “Stock of the Month” feature.)

Here’s the Accident & Health Insurance Industry Comparison for AFL:

	AFL	INDUSTRY AVG.
Dividend Yield	2.20%	1.42%
P/E	13.16	9.11
Price/Free Cash/Share	13.35	10.07
Total Debt/Equity	0.26	.21
PEG(Next 5 years)	.96	.75
ROE (TTM)	22.36%	9.29%
Operating Margin (TTM)	14.37%	2.39%
EPS Growth Rate Next 5 Years	13.74%	12.23%
Price/Book (MRQ)	2.4	.99

When you compare AFL to its industry peer group, it begins to look pricey, in terms of its PEG ratio, since the Accident & Health Insurance industry has a low PEG of only .75. AFL’s Price/Book and relative P/E are also higher than its peers.

Considering that the dividend yields for AFL and CB are both below 3%, investors may want to consider selling covered calls or cash secured put options in order to goose their returns on these 2 stocks and lower their break-even points.

We’ve added AFL to our Cash Secured Put Tables, as it currently has a 19.5%-plus annualized yield for selling its Feb. 2011 $50.00 put options.

Disclosure: Author is short puts of CINF.

Disclaimer: This article is written for informational purposes only