Tag Archives: cash-secured put options

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.

3 Small Cap Dividend Stocks With Good Earnings Growth

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By Robert Hauver

Small cap stocks have outperformed large and mid caps this year, and growth stocks have outperformed value stocks in all 3 market cap sizes.  With that in mind, we went hunting for some small cap dividend paying stocks that have past, present and future earnings growth, low PEG’s, and reasonable debt loads.  We came up with these 3 dividend stocks:

Advance America, Cash Advance Centers (AEA): Largest provider of payday cash advance services in the United States, as measured by the number of payday cash advance centers operated. Payday cash advances are small-denomination, short-term, unsecured advances that are typically due on the customer’s next payday. They provide these services primarily to middle-income working individuals.

Ennis inc. (EBF): One of the largest private-label printed business product suppliers in the United States. Ennis offers an extensive product line from simple to complex forms, laser cut-sheets, negotiable documents, internal bank forms, tags, labels, presentation folders, commercial printing, advertising specialties, screen printed products, and point-of-purchase display advertising.

Textainer Group (TGH): World’s largest lessor of intermodal containers with a total fleet of more than 1.3 million containers, representing over 2,000,000 TEU. They lease containers to more than 400 shipping lines and other lessees, including each of the world’s top 20 container lines. Yhey are also the primary supplier of leased containers to the U.S. Military.

Selected Financial & Management Metrics vs. S&P 500:

AEA-EBF-TGH-ROE-2010-12-16

The dividend yield is above average for all 3 stocks, and TGH has the edge in ROE and margins. TGH has a higher debt load, due to its capital intensive industry.

All three firms have a conservative dividend payout ratio:  AEA: 39%   EBF: 36%   TGH: 45%

Valuation Metrics:

AEA-EBF-TGH-PEG-2010-12-16

AEA looks like the most undervalued firm here. However, this is mainly due to its price having been beaten down this year, over concerns about possible future negative legislation cutting into its payday loan business.

AEA has already experienced some negative legislative impact in some of the states in which it operates.

AEA’s shares have fallen over 9% in 2010, as opposed to EBF, which is up almost 27%, and TGH, which is up over 84%.  It’s interesting to note, though, that even with these big price gains, EBF and TGH still have PEG’s under 1 for next year and the next 5 years. All 3 stocks are below the S&P average price to free cash flow.

There are Covered Calls available for AEA and TGH:

AEA-TGH-CALLS-2010-12-16

Note: If your AEA shares were assigned in this trade example , your net covered call premium would be $.42, since the $5.00 strike is $.18 below the current $5.18 share price. (You can find more details on these trades in our Covered Calls Table.)

There are also Cash Secured Put Options trades for AEA and TGH:

AEA-TGH-PUTS-010-12-16

(You can find more details on these put options trades in our Cash Secured Puts Table.)

Disclosure: No positions

Disclaimer: This article is written for informational purposes only.

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.

Dow Dividend Stocks – Top 7 Cash Secured Put Options

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By Robert Hauver

Dow dividend stocks aren’t usually mentioned in the world of high dividend stocks, but selling cash secured put options is a way you can earn some impressive double-digit annualized yields out of even these modest dividend paying stocks.

We screened for the top 7 put selling yields for DOW dividend stocks and came up with these 7 option trades:

DowPuts9-7-10

(All of the above put bid yields are based upon 100% cash reserve)

As you can see, these put yields far outstrip the dividend yields, and in a shorter 5-6 month time period.  Hence, the annualized yields are pretty impressive.

We’ve added some of these put options this week to our Cash Secured Puts Table, which will show more detail.

Why sell cash secured puts, instead of just buying the stock outright?

  1. More Risk Protection – By earning the higher put option $, you’re lowering your break-even cost, and giving yourself greater downside protection.
  2. Better Cash Flow –  You get paid the put premium within 3 days of selling puts, as opposed to waiting each quarter for a dividend payout.
  3. Higher Yields – This happens 2 ways: In the above trades, the put yields are 2 to 9 times that of the dividend yields.  Also, with your lower breakeven cost, if the shares do get assigned/put to you, the ultimate dividend yield on the underlying shares will be higher, due to its lower cost.
  4. Potential Tax Deferral –  The IRS rules state that,”If a put you write is exercised and you buy the underlying stock, decrease your basis in the stock by the amount you received for the put. Your holding period for the stock begins on the date you buy it, not on the date you wrote the put.” (Source:www.IRS.gov/publications)         This means that you don’t have to pay taxes on the put $ you received until you sell the assigned underlying shares. If you hold the underlying assigned shares for more than 1 year, you’ve also converted a short-term gain into a long-term gain.
  5. Knowing your “trade range” before trading-  This strategy tells you your maximum gain and break-even cost, before you invest, as opposed to buying, and hoping for price appreciation.

Cons

  1. Options gains are always taxed at short-term capital gains rates, which will be higher than qualified dividend tax rates.
  2. Put options sellers are required to have 100% “cash reserve” by their brokers, i.e., your broker will set aside 100% of the value of the underlying shares against which you sell puts. 100% cash reserve is always required in an IRA account, but, investors with thorough options experience may qualify for Options Level 3 trading status, which lets the broker reduce the cash reserve to a lower 25-35% approx. range, thereby employing leverage.  A note of caution here: if you do employ this type of leverage, it’s very important to keep track of your potential exposure, and not get in over your head.
  3. Cash secured put selling is a strategy that requires a bit more of a hands on approach, as opposed to the “buy and hold” strategy. However, this strategy shouldn’t be confused with day trading – Put sellers make their sale, collect the put $, and monitor the put’s value during the investment term, as opposed to jumping in and out of a trade every day.
  4. Less rally participation – The maximum gain on selling cash secured puts is the amount of $ you receive when making the put sale, so, this profit could potentially be less than the eventual price appreciation of a stock.

Is it worth it?

Some investors would argue that, if you do nothing, and the stock’s price declines, you could also own the stock a lower cost.  That could be happen, but looking at the possible outcomes in the market, selling cash secured put options offers a greater chance for income:

PutSellingOutcomes

Another issue to consider here is time value of money, and what you’ll earn on your money, while you wait for a stock to hit your price.

In addition, due to the timing factor in options, time favors an option seller over an option buyer, since the buyer must guess the stock’s ultimate price direction and price level, and must be correct before the option expires.  That’s often a very tall order, and it’s one of the reasons that 3 out of 4 options expire worthless – which is a distinct advantage for an option seller – time is on your side.

Disclosure: Author is short INTC puts.

Disclaimer: This article isn’t intended as investing or accounting advice.

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

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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:

  1. Immediate income – You receive the cash from put sales in your account within 3 days after the trade.
  2. Much higher yields – This varies, of course, but in times of increased volatility, put yields often outpace dividend yields.
  3. 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.
  4. 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:

  1. 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.
  2. 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.

FPL – A New Model: Solar Energy With Natural Gas

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By Robert Hauver

The Florida-based utility, FPL Group, is investing heavily in a new Energy plant model, one that combines Solar with Natural Gas.

In 2010, FPL will build the world’s second-largest solar plant, on 500 acres north of West Palm Beach, Florida.  The innovation of this project is that it will harness solar power on an industrial scale, by retrofitting a natural gas fired plant with solar as a backup energy source.  By using solar power in tandem with natural gas, FPL will be able to cut its natural gas use at the plant during times when it needs the most power, namely the intensely hot Florida summers.

This plant will also be a test of how much you can reduce the cost of solar power, by combining it with natural gas.  FPL hopes to cut costs by 20% with this hybrid model, since it won’t have to construct new steam turbines and power transmission lines.  The solar part of this plant will generate 75 megawatts at peak times, while the natural gas part will generate approx. 3800 megawatts.  (One megawatt can power approx. 150 homes).

This natural gas/solar energy model will hopefully help to solve the problem of having a stable, but renewable energy source.  Utilities are being pushed by legislators at state, local and federal levels, to come up with renewable power solutions that reduce carbon emissions, but, since wind and solar energy are sometimes intermittent, maintaining a steady power supply with only these energy sources can often be challenging, and costly. FPL’s use of cheap natural gas in tandem with solar energy in Florida, the “Sunshine State”, could solve the power reliability problem, reduce carbon emissions and foreign oil usage, and provide a working model for harnessing solar power in an economic manner.

The Utilities sector is known for its dividend paying stocks.  FPL closed at $48.16 on Friday, Mar. 19th, and currently pays $2.00/year, a 4.15% dividend yield.  There are also call options and put options available, for investors looking to sell covered calls or cash-secured puts. (See our Covered Call table).  The Jan. 2011 $50 call closed at a bid of $2.15 yesterday, a 4.5% nominal yield.  If the shares are assigned, this covered call trade would also net the call seller an additional $1.84 in price appreciation, for a total return of $5.49, an 11.4% yield, over a 10-month term, or 13.78% annualized.