Monthly Archives: October 2010

Cummins – An Industrial Dividend Stock WIth Great Earnings and High Options Yields

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By Robert Hauver

Cummins, (CMI), is an Industrial dividend stock that just reported Q3 2010 earnings that blew away their Q3 2009 numbers, and also increased its credit rating during the quarter:

CMI-Earns-2010-10-27

The results were favorably impacted by $32 million due to a legal ruling in Brazil involving tax on imports from 2004 through 2008. (Adjusted net income excludes the Brazilian tax gain.)

All 4 of CMI’s market segments had strong Q3 Sales and Earnings Growth:

CMI-Sales-2010-10-27

Cummins COO said, “Many of our U.S. markets remained weak as a result of the slow recovery in the U.S. economy,”, and added, that the company doesn’t “expect to see any meaningful improvement until 2011” in the U.S., BUT, business in emerging markets “has come back much faster than we had forecast.”

CEO Tim Solso stated, “Our strength in large international markets provided significant benefits to the company, and we continue to see productivity improvements in our manufacturing operations.”

Overseas sales increased 69% in the third quarter, led by India, Latin America, South Pacific and the U.K., and now account for 63% of CMI’s consolidated revenues.  North American sales declined 3%.

In response to its third-quarter profit tripling from a year ago, CMI is raising its quarterly dividend by 50%, to $.265/share, a yield of 1.19%, AND raised its full-year financial EBIT guidance to 12.5% of sales on revenues of $13 billion.  CMI also bought back $79 million of its shares in Q3 2010, bringing total shares repurchased to $389 million under its current $500 million authorization.

Apparently, increasing revenue by 34%, tripling its profit, substantially raising the dividend, AND increasing their guidance, still wasn’t good enough for some analysts, who had pumped up expectations for CMI even further, (Hmm, do we  sense “irrational exuberance” in the wind?), and the stock got hammered, falling nearly 8%, from $94.49 to a low of $87.00 after reporting earnings.

Fortunately for contrarians and value investors, such hysteria creates opportunities. This big fall has inflated CMI’s call options and put options, which now offer double-digit yields for covered calls and cash secured puts:

CMI-Calls-Puts-2010-10-27

There are further details on these options trading strategies in our Covered Calls table and in our Cash Secured Puts table.

Company Profile:

Cummins designs, manufactures, distributes and services engines and related technologies, including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems. Headquartered in Columbus, Indiana, Cummins serves customers in approximately 190 countries and territories through a network of more than 500 company-owned and independent distributor locations and approximately 5,200 dealer locations. Cummins reported net income of $428 million on sales of $10.8 billion in 2009. (Source: Cummins website)

If you’re looking for dividend paying stocks with strong international sales and earnings, Cummins is worth researching further.

Disclosure: Author is short puts of CMI.

Disclaimer: This article is written for informational purposes only.

3 Brazilian Basic Materials Dividend Stocks With High Option Yields

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By Robert Hauver

Are you looking for undervalued dividend paying stocks? If you think that emerging markets will keep expanding, maybe you should take a look at the Basic Materials sector, which has only risen 6.6% in the past year, vs. the Consumer Goods sector, which is up 19.5%. We found 3 Brazilian stocks in the Basic Materials sector that stand to profit from emerging market growth:

Vale, (VALE), Gerdau, (GGB), and Companhia Siderurgica Nacional (SID).  Although none of these firms’ dividends are high enough to be in our High Dividend Stocks tables, you can still achieve double digit yields via selling covered calls or cash secured puts, (see tables below). These dividend stocks all suffered in the ongoing downturn, as evidenced by their negative EPS growth for the past year, but when you look at their prospects for next year, it’s a much better story, with very low next year PEG ratios:

3Braz-Val'n_2010-10-21

Mgt., Financial, and Dividend Ratios:

3Braz-ROE-2010-10-21

SID has the highest debt load, which they’re using to fund expansion – (see profiles below for more info on this).

Selling Covered Call options would greatly outstrip the dividend yields of these 3 firms:

3Braz-Calls_2010-10-21

Selling Cash Secured Puts would also earn you double digit annualized yields and achieve a lower break-even price:

3Braz_Puts_2010-10-21

(There is more info about these option trades in Covered Calls table and also in our Cash Secured Puts table.)

Company Profiles:

Vale (VALE):

Morningstar ranks the Brazilian iron ore giant as having one of the strongest credit profiles in the mining industry, due to its large and low-cost Brazilian iron ore mines.

While acquisitions have given Vale a substantial presence in nickel and to a lesser extent copper, coal, and potash, iron ore remains pre-eminent in the portfolio and is the biggest determinant of the firm’s credit profile. From 2005 through 2009, the business was immensely profitable, booking a yearly average $8.2 billion in EBITDA on $14.9 billion in sales.

If Chinese seaborne iron ore demand (68% of the 2009 global total) remains strong, Vale’s iron ore business will continue to throw off massive amounts of cash. Even if Chinese demand wanes and prices fall, one would nonetheless expect the business to generate respectable cash flow. In the second quarter of 2009, when realized iron ore prices fell 31% from prior-year levels, the business still generated an impressive 50% EBITDA margin.

Vale has started a major investment program intended to boost capacity across its portfolio. While iron ore and, to a lesser extent, nickel will remain its key businesses, the firm seeks to diversify its revenue streams with investments in copper, coal, and fertilizer minerals.

Vale aims to lower its cost of serving the Chinese steel industry by investing in a small armada of “very large ore carriers”, or VLOCs in industry parlance, and distribution centers in Asia.. The first VLOC is expected to be ready for service in early 2011. Nickel and copper aren’t subject to the same geographic constraints as iron ore, owing to their higher value/weight ratio, while the majority of Vale’s coal assets are well situated to serve China and other Asian markets. Vale boasts massive,efficient, and highly integrated iron ore operations in Brazil, which should generate substantial economic rents.  (Source: Morningstar)

Gerdau (GGB):

Gerdau is the second largest long steel producer in the world,with operations mostly in the Americas, and a dominant position in the Latin American steel market. The recent Gerdau-Ameristeel consolidation provided the company with a streamlined operation in North America, forming a favorable launch pad for expansion. GGB is expected to continue growing in North America and Europe and increase its product diversity with flat steel capacity.

Nearly 60% of the company’s sales are generated in Latin America, with another third in the United States. The company has more than 20% of the Brazilian market and a decent foothold in the U.S. through its ownership of Gerdau Ameristeel, the second largest mini-mill operator in the U.S.  Gerdau Ameristeel produces a similar mix of long products serving the construction and industrial sectors in North America. Brazilian steel demand should gain momentum as a result of infrastructure projects related to the 2014 World Cup and 2016 Olympic Games.(Source: Morningstar)

Companhia Siderurgica Nacional (SID):

SID is one of the most profitable steel companies in the world, operating both flat steel mills and iron ore mines in Brazil. It is fully self-sufficient in iron ore and has become the sixth-largest seaborne iron ore exporter in the world. Its low-cost production and captive raw materials make the company one of the dominant players in Brazil.

A vertically integrated steel producer, with operations spanning mining, logistics, electricity, and downstream businesses, SID is expected  to continue using its balance sheet to fund growth opportunities globally and develop long steel production capacity. SID has a 35% market share of the Brazilian flat-rolled market, an attractive position due to Brazil’s low input and labor costs and growing steel consumption. SID has invested vertically in mining, electricity, and transportation and logistics to support its steel business and these have provided more than just cost control. Iron ore mining has quickly become an important revenue stream and SID plans to accelerate the growth of that segment.

Caveat: SID’s heavy debt load makes the company vulnerable to an extended period of depressed steel prices and demand. The interest coverage ratio dropped to 1.7 times at the end of 2009 from 8.4 times the year prior. Total debt almost doubled to $7.8 billion. Although some of the credit metrics are weak for an investment-grade rating, SID is expected to improve them through stronger operating performance.

2011 Industry Outlook:

While the forecast for China is for a fairly low growth rate compared to other countries, its apparent steel use in 2011 will be 42% above 2007 level. China will account for about 45% of world apparent steel use in 2011.

Aided by stock building activities and a recovery in manufacturing, apparent steel use in the US is expected to grow by 32.9% in 2010 and then 9.4% in 2011, bringing it back to 79.7% of the 2007 level. For NAFTA as a whole, apparent steel use will grow by 31.3% and 8.7% in 2010 and 2011 respectively.

In Central and South America,  the region’s steel demand is coming back strongly thanks to recovering commodity prices, exports and renewed capital inflows. The region’s apparent steel use will grow by 28.2 % in 2010 aided by a strong rebound of 34.6% in Brazil. In 2011, the region’s apparent steel use will grow by 9.1%, a historical high for the region and 14% higher than the 2007 level. (Source: World Steel Association)

Disclosure: Author is short puts on Vale.

Disclaimer: This article is written for informational purposes only, and is not intended as investment advice.

The Most Undervalued Energy Dividend Stock In The S&P 500

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By Robert Hauver

This week we looked for undervalued S&P 500 dividend paying stocks in the under-appreciated Energy sector, which has only risen 3.40% year-to-date, vs. the leading Consumer Discretionary sector, which is up nearly 16%.  Fortunately for income investors, the Energy sector also happens to include many dividend stocks.

Our search led us to Conoco Philips, (COP), which is listed in the Energy Stocks section of our High Dividend Stocks By Sector Tables. We then compared COP to its Major Oil & Gas Firms peer group, and came up with favorable ratio comps in valuation, financial, and management efficiency, although COP doesn’t come out on top in every metric.

Valuation:

COP-PEG-2010-10-15

As the the above table illustrates, COP’s next-year PEG ratio, (Price/Earnings Growth), and its next 5 years PEG ratio are both way below that of its peers.

Financial Ratios & Dividend Info:

COP-ROE-10-15-10

COP pays $.55/share quarterly, and its next ex-dividend date is Oct. 27th, with a pay date of Nov. 30th.  As the table above shows, COP’s current dividend yield of 3.65% lags its peer group’s 3.94% average dividend yield.

However, you can improve upon this via 2 options trading strategies: selling covered calls and selling cash secured puts.  The table below lists bid premiums you’d receive for selling Feb. 2011 covered call options and cash secured put options.

COP-CALL-PUT-2010-10-15

There is more detail listed for both of these trades in our Covered Call Table and in our Cash Secured Put Table.

In the covered call trade listed above, you’d receive $3.20/share in call premiums, in addition to the $1.10 in dividends prior to expiration, thereby nearly quadrupling your cash yield during this 4-month trade, and bringing your breakeven down to $55.70. The above put option trade would also greatly improve upon the dividend payout, netting you $3.80 in put option premiums, vs. only $1.10 in dividends for the same 4-month period, and lowering your breakeven to $56.20.

Disclosure: No positions at this time.

Disclaimer: This article is written for informational purposes only, and is not intended as investment advice.

The Most Undervalued Utility Dividend Stock In The S&P 500

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By Robert Hauver

Looking for undervalued dividend paying stocks in the dividend rich Utility sector?  This week we screened the S&P 500 for low Price/Earnings Growth, Low Price/Book, Low Debt dividend stocks, and came up with Constellation Energy Group, (CEG), a diversified electric utility stock, which has one of the lowest “unadjusted” PEG ratios we’ve seen in awhile: .15

CEG Profile Highlights:

  • CEG operates in 3 segments: Merchant Energy, Regulated Energy, and Regulated Gas.
  • A supplier of energy products and services to wholesale and retail electric and natural gas customers.
  • A major generator of electricity with a diversified fleet of generating units strategically located throughout the United States and Canada, totaling approximately 9,000 megawatts of generating capacity.
  • Among the leaders pursuing the development of new nuclear plants in the United States.
  • A regulated distributor of electricity and natural gas in Central Maryland through their utility firm, Baltimore Gas and Electric Company.
  • A FORTUNE 500 energy company, headquartered in Baltimore, Md., with revenues of $15.6 billion in 2009.

Digging a bit deeper shows that CEG’s current low P/E and PEG result from a large one-time asset sale in 2009, which skewed earnings much higher. We’ve used the adjusted earnings figures from CEG’s quarterly reports for the table below, in order to give a clearer picture of ongoing earnings.  However, even with these figures, CEG still appears to be cheaper than its peers in most metrics.

Valuation & EPS:

CEG-Val-Eps

Management Efficiency, Yield, Debt, Profit Margin Comparisons are also favorable:

CEG-ROE

CEG also has call options and put options available. The table below reflects an April 2011 covered call trade and a cash secured put trade.  Currently, the put options are commanding a higher premium, mainly due to their higher intrinsic value.  (There are more details about these trades in our Covered Calls table and our Cash Secured Puts table).

Puts

CEG has lagged the market, moving up less then approx. 3% in the past year, and most of this price gain has been during last month’s rally. By selling covered calls, you could earn $1.53 in dividends and call option premium in a little over 6 months, (9.19% annualized), vs. just $.48 in dividends during this time, thereby tripling CEG’s 3% dividend yield.

Conversely, selling cash secured puts would net you $2.05 in put premiums, and an even lower breakeven of $27.95.

Disclosure: No positions at this time.

Disclaimer: This article is written for informational purposes only and is not intended as investment advice.

3 Undervalued S&P Dividend Stocks With High EPS Growth & Attractive Option Yields

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By Robert Hauver

We screened the S&P 500 this week for low PEG, high EPS growth, low debt, dividend stocks with attractive option yields.  These 3 firms all had strong EPS growth this year, ranging from 46% to almost 400%.  They also are projected to have EPS growth next year of 11% to 16%+, and have similar strong 5-year growth figures, which contributes to their low PEG ratios.

One of these firms, Conoco Philips, (COP), is listed in the Energy section of our High Dividend Stocks by Sector tables. While the other 2 firms, Comcast, (CMCSA), and Prudential, (PRU), don’t have high dividend yields, you can achieve good yields on them by selling covered calls or by selling cash secured puts.

Here are the EPS growth and related PEG ratios for these 3 firms:

COP-CMCSA-PEG

Here are their dividend yields, ROE, debt and profit figures:

COP-ROE

These 3 firms also all have a low dividend payout ratio, ranging from only 8% to 34%. As you can see, these dividend paying stocks don’t have the highest dividend yields around, but you can still earn a respectable yield on them by selling covered call options, which are currently achieving double digit annualized yields of 16%-plus to over 19%:

COP-CMCSA-Calls

(Static Yield also includes the dividends you’d collect before expiration. There’s a breakdown of this in our Covered Calls table).

Likewise, selling cash secured put options can also give you a double-digit annualized yields, while also lowering your breakeven cost:

COP-Pru-Puts

(These put yields are based upon a 100% cash reserve). You can find further details in our Cash Secured Puts table.

If you’re looking for income from dividend stocks that have fared well in this challenging economy, undervalued stocks with good growth prospects offer a good place for further research. Thus far in 2010, growth stocks have outpaced value stocks in large, mid, and small cap stocks.

Disclosure: No positions yet.

Disclaimer: This article is written for informational purposes only, and is not intended as investing advice.