Monthly Archives: June 2011

5 Defensive Utility Dividend Stocks With Institutional Buying

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By Robert Hauver

We’re following the big money trail again this week, with an eye toward defensive dividend stocks, which leads us to Utilities. The Utility sector is up over 4% for the past 3 months, second only to the Healthcare sector, which is up nearly 7%. We found 5 dividend paying stocks in the Utilities sector, with increasing institutional buying,  ROE over 5%, and positive EPS growth this year and projected for next year, among other metrics.

HE-ARTNA-INST'LBUY'G

HE: Is in the electric utility and banking businesses, mainly in Hawaii. Strange mix, eh?

ARTNA: Provides water, wastewater, and engineering services in Delaware, Maryland, and PA.

OGE: Offers delivery of and services for electricity and natural gas, including company-owned gas pipelines, in the southwestern US.

VVC: Does natural gas transport and distribution, electric generation and distribution, in addition to coal mining and sales.

BIP: It’s a bit of a misnomer to call BIP a utility, since this is just one part of their many businesses – they also own oil & gas pipelines, port facilities, timberlands, and healthcare facilities. These other parts have helped them achieve higher ROE and EPS growth numbers, which you’ll see in the following tables.

Selected Financials:

We’ve added 3 of these utility stocks to the Utilities section of our High Dividend Stocks By Sector Tables: HE, VVC, and BIP.

BIP is the only stock in this group that exceeds all of the broad sector avgs., due to its diversification into other higher margin businesses. ARTNA’s share count increased nearly 10% from 2007 to 2010 – which accounts somewhat for its lower ROE figures. ARTNA also had heavy capex figures over the past 4 years, which depressed their ROI ratio. (In the heavily regulated water and power utility industries, companies often aren’t able to increase prices and profits quickly enough during major capex programs, hence the firms’ ROI figures lag other sectors, such as Basic Materials.)

All of these firms have reasonable debt loads, vs. sector avgs., and HE, VVS, and BIP have an above-average dividend yield for their sector.

HE-ARTNA-ROE

Valuations: Although utilities aren’t considered a growth sector, by any means, 2 of these stocks actually look undervalued on a next year PEG basis: BIP and HE. Additionally, BIP’s 5-year PEG is only .92. The Price/Book figures for these 2 stocks are also much lower than sector standards, and BIP has a very low Graham P/E x P/Book figure of 4.63.

HE-ARTNA-PEG

Technical Data: OGE, ARTNA, and VVC have very low beta’s, which, in addition to their dividends, attract conservative investors. Performance-wise, only BIP is currently above its 50-day avg., and, with a 61.53 RSI figure, is in the bottom of the very lowest overbought echelon.

HE-ARTNA-PERF

There are covered call and cash secured put options trades available on all of these dividend stocks, except ARTNA.  However, only BIP has relatively attractive options yields, which we’ve listed in our Covered Calls Table and in our Cash Secured Puts Table.

Disclosure: Author is long BIP.

Disclaimer: This article is written for informational purposes only.

3 High Dividend Stocks With Heavy Institutional Buying

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By Robert Hauver

Wondering what high dividend stocks the big boys have been buying during the pullback? So were we, so we screened for high dividend paying stocks with heavy institutional buying over the past quarter, and came up with 3 foreign dividend stocks -  2 Energy stocks, and a Utility stock, all 3 of which are listed in our High Dividend Stocks by Sector Tables :

NGG-PGH-YPF-INSTIT

Even with these big increases in institutional buying, these 3 foreign dividend stocks still have a lot of room to grow for more institutional ownership.

Financial Metrics:

NGG-PGH-ROE

YPF and NGG pay semi-annual dividends, which is fairly typical of many foreign stocks, while PGH is a former trust which converted to a corporation on Jan. 1, 2011, as did many Canadian trusts, due to the change in Canadian tax laws.

PGH’s anemic Return on Equity of only 4.24% is typical of many Canadian Oil & Gas exploration firms, which finance their expansion through issuing shares, vs. taking on a heavy debt load. Their dividend payout ratio is also misleading, since, like many energy firms and MLP’s, PGH typically gauges its dividends more on distributable cash flow. Their annual earnings release stated that, “During 2010, Pengrowth’s distributions declared and capital expenditures were 95% of operating cash flow (before changes in working capital) with the remaining cash being used for debt reduction.”

Valuations:

NGG-PGH-PEG

Not surprisingly, energy stocks PGH and YPF sport much lower PEG’s for their next fiscal years than utility stock NGG does.  It’s tough to find utility stocks with attractive growth figures, due to the heavy regulation in the utility industry.  Analysts aren’t currently impressed with PGH’s long-term growth prospects however, while YPF has the most attractive 5-year PEG valuation of the group.

PGH’s 1.24 Price/Book valuation is much lower than its peer group avg. of 2.55, while YPF’s 3.54 P/Book is higher than its Integrated Oil & gas peers’ avg. of 2.16.  NGG’s 2.26 P/Book is also higher than its peers.

So, other than high dividend yields, what else is attracting institutional buyers to these stocks?

Here are 2 compelling metrics that may be the answer:

NGG-PGH-EBITDA

2 out of 3 firms have low EV/EBITDA ratios, while all 3 have much lower Price/Cash Flow/Share than their Industry peer groups.

Share Performance/Technical Data:

NGG-PGH-PERF

Another attraction is probably the low beta’s for NGG and YPF. As a utility, NGG has also benefited from its defensive sector being the second leading sector year-to-date, and in the past quarter.

Covered Calls:

You can easily double your dividends by selling covered call options for these foreign dividend stocks, as all 3 have call options that equal or exceed their dividend payouts over the next 7-8 months:

NGG-PGH-CALLS

You can find more details for these and other covered call sales in our Covered Calls Table.

Cash Secured Puts:

If you to be more conservative, selling cash secured put options will give you a lower break-even price, with fairly high option yields also.

You can find more details for these and other put options sales in our Cash Secured Puts Table.

NGG-PGH-PUTS

Note: Put sellers don’t receive dividends – we only list them in our tables for comparison. In the above examples, the put options range up to over 2.5 times the dividends’ values.

Disclosure: No positions yet.

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

Dogs Of The Dow – Double Your Dividend With Options

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By Robert Hauver

We checked the top 5 current Dogs of the Dow, (the current Dow component stocks with the highest dividend yields), to see how their dividends stack up vs. their covered calls and cash secured puts.  Selling covered calls can be an effective way to protect your portfolio in a down market.

The current Dow Dogs are:

DOW-DOGS-6-11-DIV-PERF

As is often the case, Telecoms have the highest dividend yields in the group, with AT&T and Verizon topping the list.  These 2 dividend paying stocks are in the Telecoms section of our High Dividend Stocks By Sector Tables.  Two Healthcare dividend stocks and Tech giant Intel round out the list.  Verizon has the most aggressive dividend payout ratio, and Intel the most conservative.  Performance-wise, only Pfizer has gained much year-to-date, while Intel and Merck have lagged the others over the past year, which, in Intel’s case, belies the strong EPS growth over the recent past:

DOWDOGS-PEG-6-11

All 5 firms posted sequential EPS gains in the most recent quarter, but Pfizer was the laggard.  Analysts don’t currently believe that Intel can improve a great deal next fiscal year, given the outstanding 160% EPS growth it had this past fiscal year, which gives INTC a high 12-month PEG.  AT&T has the lowest 12-month PEG, 1.25, and the two healthcare stocks look very over-valued, when taken on a PEG basis. Looking out further, only Intel has a 5-year PEG under 1. Intel’s 10.12 P/E is also way below the average 16.41 P/E for the semi-conductor industry.

Financial Ratios:

DOWDOGS-ROE-6-11

AT&T and Intel are the clear winners in Mgt. efficiency ratios and margin, while Intel is nearly debt-free.

So, how do the dividends for these stocks compare to their January 2012 options? These call options range up to 3 times the dividend amounts.  Selling a covered call from any of the trades listed below allows you to at least double your dividend, giving you a 10%-plus static yield, and the potential for additional assigned yield gains. You’ll also get some additional downside protection, via a lower break-even point, by selling covered calls.  The catch is that you’ll have limited participation in upside price gains, should any of these dogs start to run. You can find more info on these and other covered call trades in our Covered Call Table.

Covered Calls:

DowDogs-6-11-CALLS

Feeling not so bullish? Selling cash secured put options can give you an even lower break-even point than the calls listed above. The put premiums below range up to 6 times the dividend amounts for this period.  Your net cash outlay will be the cash reserve minus the put premium you receive. Ex.) For AT&T, you’d have a net outlay of $2,778.00, ($3000.00 less $222.00 received for selling one put. Each options contract corresponds to 100 shares of the underlying stock).  You can find more info on these and other covered call trades in our Cash Secured Puts Table.

Cash Secured Puts:

DOwDogs-6-11-PUTS

Disclosure: Author is long AT&T and Intel.

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

An Undervalued Healthcare Dividend Stock With Growth Potential

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By Robert Hauver

With what looks like a rocky summer ahead of us, you might be searching for dividend paying stocks in defensive sectors, such as Healthcare.  Investors have been favoring Healthcare stocks so far in 2011, sending the sector up nearly 14% year-to-date. The problem for income investors, though, is that the healthcare stocks that have performed the best don’t pay dividends – indeed there are only 5 dividend stocks in the top 100 performing healthcare stocks year-to-date, and those 5 have low dividend yields of around 1% +/-.

We wondered if there are any undervalued dividend stocks that institutional investors have been buying, and we came up with one: Psychemedics, (PMD), a micro-cap, drug-testing firm, with a dividend yield approaching 5%.  PMD is listed in the Healthcare section of our High Dividend Stocks By Sector Tables.

Psychemedics was established in 1987 to provide testing for drugs of abuse using hair analysis and has been successfully operating for over 20 years. Psychemedics has obtained FDA clearance on all drug categories and is the only lab to have clearance not limited to head hair (including head and body hair clearances). (Source: PMD website)

Here’s a market cap & dividend breakdown for PMD, and its 3 major competitors:

PMD-DIV

Of these 4 firms, PMD is the purest play on drug testing, where it enjoys the leading market share. The May dividend was their 59th consecutive quarterly dividend.

Institutional investors have favored PMD over its peers, and the current short ratio is also nearly zero.

PMD-PERF

Even with institutional buying evident, PMD is also currently oversold, with a low stochastic reading of under 20, and a Relative Strength Index of only 33.54.

To be sure, PMD is the runt of the litter, with only a $51 million market cap vs. these other firms, but look at how it stacks up in efficiency and profitability, in addition to being debt-free:

PMD-ROE

Valuations:

PMD-PEG

PMD struggled during the recession, which accounts for its poor past 5 Year EPS figures. However, they’ve turned in positive earnings surprises in 3 of the last 4 quarters., and they look undervalued, with a 12 month PEG of only .59, due to their strong growth forecast.

PMD doesn’t have options, so there are no covered calls or cash secured puts trades available.

Disclosure: Author is long PMD.

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