An Undervalued High Dividend Stock With Lucrative Cash Secured Puts

Posted on May 15, 2013

by Robert Hauver
We first wrote an earlier article about Northern Tier Energy LP, (NTI), back in early April, when the big question was whether or not this MLP would continue to pay its huge quarterly dividend. This older article also details NTI’s business model, which we like.
In February, NTI paid out a $1.27 dividend, which equated to an 18.55% forward dividend yield, making it one of the highest yielding dividend paying stocks in the market, and putting at the top of the Energy table in our High Dividend Stocks By Sector Tables.
Well, we’re happy to report that, thanks to a big blowout quarter, in which NTI reported an adjusted net income of $108.2 million, that was 20 times its Q1 2012 adjusted net income, NTI is keeping the faith, with another huge distribution, which goes ex-dividend on May 21,2013:

“The Board of Directors of Northern Tier Energy GP LLC, the general partner of Northern Tier Energy LP, has approved a first quarter distribution of $1.23 per unit that will be paid in cash on May 30, 2013 to common unit holders of record as of the close of business on May 23, 2013.” Cash available for distribution totaled $113.2 million for the first quarter 2013.” (Source: NTI website)

This continuing huge dividend payout raises the same question it did in the 1st quarter of 2013: Will NTI keep making these big quarterly distributions, or will it trim its payouts in the next few quarters?
Fortunately, NTI also has high options yields, which give you some alternatives. We currently have a very attractive September $25.00 put listed for NTI in our Cash Secured Puts Table. This put will pay you $2.60 now, and expires in roughly 4 months, which gives you a 30%-plus annualized yield.
To put this into perspective, even if NTI matches its current $1.23/unit May payout in the next quarterly payout, in August, you’d receive $2.46 in distributions, (possibly), vs. $2.60, for sure, right now, by selling the September $25.00 put. The other benefit of this trade is that it gives you a $22.40 breakeven, which is 16% below NTI’s current price/share.

The traditional, simpler approach is to buy NTI outright, and hold onto the shares long-term, using the dividend stream for income, and to ride out the potential ups and downs of NTI’s future share price and distributions.
We’ve adopted a combo of 2 strategies for NTI, since we believe in its business model: 1. Buy and hold for income and potential price appreciation 2. Sell cash secured puts, in order to gain additional income, and lower our ultimate breakeven cost.

NTI also has Covered Calls, which we list in our Covered Calls Table, where you can also see details on over 30 other covered calls trades.
However, the problem with adopting a short-term Covered Call trade for NTI is the uncertainty surrounding its next quarterly distribution – will it be $1.23 again, or will they cut the next distribution?
The biggest short term obstacle in NTI’s path is that they’ll be doing a scheduled shutdown of their refinery in the 2nd quarter for about 25 days. But there’s a silver lining- they’re doing the shutdown in order to expand their refining capacity. Yes, the 2nd quarter will show lower earnings, BUT, long term, the shutdown is a positive for NTI and its shareholders, due to the expanded capacity.
Institutional investors also believe in NTI’s future growth, as do analysts, who are projecting big EPS growth for 2013 and 2014, making NTI look undervalued on a PEG basis:

Disclaimer: This article was written for informational purposes only and is not intended as investment advice.
Disclosure: The author was long NTI shares and short NTI put options at the time of this writing.

Can This High Dividend Stock Maintain Its 18% Dividend Yield?

Posted on April 10, 2013

by Robert Hauver

Looking for high dividend stocks? Our search for interesting dividend stocks has uncovered a refining/retailing/pipeline stock with one of the highest dividend yields in the market: Northern Tier Energy, (NTI), is a combination refining/retailing company, based in St. Paul, Minnesota, near the booming Bakken shale play in the Midwest.

NTI’s ability to source Bakken light sweet crude and Western Canadian heavy crude, gives it a big advantage as a refiner, since both of these sources are cheaper than West Texas Intermediate crude. NTI owns one of only two refineries in Minnesota and one of four refineries in the Upper Great Plains area within the PADD II region.

In addition to refining, NTI also has a ready sales outlet for its refined products, as it owns 166 convenience stores under the SuperAmerica brand and also supports 68 franchised convenience stores, mainly in Wisconsin and Minnesota. NTI also owns various storage and transportation assets, including a light products terminal, a heavy products terminal, storage tanks, rail loading/unloading facilities and a Mississippi river dock.

The refining business also includes a 17% interest in the Minnesota Pipe Line Company, which owns and operates the Minnesota Pipeline, a 455,000 bpd crude oil pipeline system that transports crude oil (primarily from Western Canada and North Dakota) for approximately 300 miles from the Enbridge pipeline hub at Clearbrook, Minnesota to the refinery. The Minnesota Pipeline has historically transported the majority of the crude oil used and processed in the refinery. (Source: NTI website)

Dividends: Since its IPO in July 2012, NTI has paid 2 distributions: $1.48 on 11/29/12, and $1.27 on 2/28/13. Projecting their most recent $1.27 distribution forward for 3 more quarters gives NTI a very high dividend yield of 18.55%!

Here’s the million $ question: Will NTI maintain this level of dividends? The following may offer a clue for the upcoming May distribution:

In the 1st quarter of 2013, the avg. retail gasoline price was $3.55, better than 4th quarter 2012. If you use 37% as a projected ratio of distribution paid to avg. retail gasoline price, this would indicate a potential May payout of $1.31. Of course, this is a very rough estimate, and it could be derailed by other factors – NTI’s refining margins may have shrunk in the 1st quarter, or mgt. may decide to utilize more of its cash for infrastructure expansion investments. NTI stated in a recent investor presentation that it “plans to invest in logistics operations targeting trucking, terminal and pipeline assets.”

Given this uncertainty, and NTI’s big 88% rise since its IPO, what should you do?
Options: Here’s what we did, (so far). We sold puts below NTI’s share price, to lower our breakeven, in case the stock price falls, if NTI cuts its May distribution. This trade projects the same quarterly distribution of $1.27 in May and August. Coincidentally, the Sept. 2013 $25.00 put pays $2.50, which nearly matches this projected payout. (Note: put sellers don’t receive dividends.) You can find more details on this and over 30 other put trades in our free Cash Secured Puts Table.

Covered Calls: Alternatively, you could buy NTI and sell covered calls to hedge your bet. This would pay you less option $ up front, but allow you to participate in future distributions and potential price gains.
This trade, from our Covered Calls Table, offers a $1.60 call premium, plus the potential for $2.61 in price gains, ($30 call strike minus $27.39 share price). You’ll also receive NTI’s next distributions, unless NTI rises above $30 before the ex-dividend dates, and your shares get assigned/sold. NTI should announce its next distribution sometime around May 13th.

Earnings: NTI looks very undervalued on a 2013 PEG basis, but analysts are projecting much less growth for 2014. However, given its ability to pay very attractive distributions thus far in its short history, even if NTI just keeps its yield in the “double-digit realm”, its dividend yield should continue to attract investors, and support its share price in the future.

Financials: NTI’s ratios look better than its peers so far. It does carry more debt, but it has sufficient Interest Coverage and a strong Current Ratio:

Disclaimer: This article was written for informational purposes only and is not intended as investment advice.
Disclosure: The author was short NTI put options at the time of this writing.

A Tech Dividend Stock With Undervalued Growth

Posted on January 5, 2013

by Robert Hauver

Looking for Tech dividend stocks with growth in 2013? Many investors have taken note of the fact that the Tech sector grew its dividends fastest of any sector in 2012. Couple this with the potential for earnings growth in this sector, and it makes for a compelling dividend hunt.

We found a Tech stock which not only pays a regular dividend, but also recently paid a special dividend, and has a low PEG ratio for its upcoming fiscal year.

Founded in 1982, Maryland-based Tessco, (TESS), services organizations responsible for building, using and maintaining wireless broadband systems. It offers many different product lines, including base station infrastructure, installation test/maintenance, network systems, and mobile devices/accessories.

TESS is a micro-cap stock, with a $195 million market cap, and is listed in the Tech section of our High Dividend Stocks By Sector Tables, after the firm’s special dividend doubled its dividend yield.

Earnings: Tessco’s fiscal year typically ends at the end of March, so, even though the chart below shows much better growth in 2014 than 2013, Tessco’s 2014 fiscal year will begin soon, in April 2013:

TESS also had good growth in its most recent quarter, and a low .75 5-year PEG ratio. Using the 15% 5-year growth figure and a risk-adjusted discount rate of 10.89%, gives a $39.27 estimated value for TESS, which closed this week at $24.24:

Dividends: TESS did the right thing by its shareholders, by declaring a special dividend of $.75, when nobody knew what US dividend tax policy would be in 2013. With its low debt load, the company had the cash to do this. TESS has paid dividends since 2009, and has nearly tripled its quarterly payouts since then, going from $.0667, to the current $.18/quarter.

Unfortunately, TESS isn’t listed in our Covered Calls Table, or our Cash Secured Puts Table, as there are no options available for it at present.

Financials: Although TESS works on slimmer margins, this should be improving soon, as it is transitioning from a low margin business with a major Tier 1 carrier, to more profitable business elsewhere. Its management efficiency ratios and debt load look favorable vs. its industry’s averages:

Performance/Technical Data: TESS had quite a run in 2012, and is also up 8.7% for the first 3 trading days of 2013. This stock should be a good one to add to your watch list, and buy on the dips that will most likely happen when our pals in DC start doing the debt ceiling tango in a few weeks.

Disclosure: The author was long TESS shares at the time of this writing.

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

The Strongest Dividend Growth Sector In 2012

Posted on November 29, 2012

by Robert Hauver

Up until the 2008 market crash, the financial sector was one of the dividend kingpins of the S&P 500, contributing over 20% of all dividends for the index. However, in 2009, this sector’s contribution shrank to only 9%, and even dipped below that in 2010. In 2012, the financial sector has contributed 12.54% thus far.

Meanwhile, the tech sector has kept expanding its amount of dividend paying stocks, which now stands at 56% and has the largest contribution of dividends to the S&P 500 in 2012:

Which tech firms represent these new dividend stocks? We’ve listed below the four new payers for 2012, and then the stocks with the highest dividend increases:

Click to enlarge images.

Here’s how these stocks compare for earnings growth, ranked by estimated PEG for their next fiscal year:

As is often the case, Apple (AAPL), by virtue of its low P/E and strong growth, is at the top of the list. However, Visa (V) is also an interesting growth story due to its 2012 earnings being skewed downward by a big one-time litigation settlement.

On an adjusted basis, Visa’s P/E is around 23.66 vs. the 46- 79 range some of the financial websites are reporting. In addition, unlike Nvidea (NVDA), which has underperformed in 2012, Visa has a strong defensive element — it has done well in rallies and in pullbacks:

Options:

With its 44% gain this year, you may want to wait for Visa to dip in price before diving in. At present, it looks overbought on its stochastic chart.

An alternative strategy for capitalizing on the next price dip would be to sell cash secured puts below Visa’s stock price, which will offer you immediate income and a lower breakeven price. Here’s a comparison of two put trades for Visa, which illustrates the difference in actual put option premium money received, their respective annualized yields, and breakevens.

You can find more info on these and over 30 other trades in our Cash Secured Puts Table:

Disclosure: I’m long V, via being short V put options.

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

A Stealthy Oversold High Dividend Stock With Growth

Posted on September 21, 2012

by Robert Hauver

We live in the Age of Information, where small investors can get an amazing amount of data on publicly traded stocks, just by clicking a mouse or touching a touchpad. But sometimes, it looks like the Age of Misinformation – Espy Mfg., (ESP), is a good case in point. Many of the finance websites that list a stock’s dividend history are overlooking something significant for Espy – a big special dividend that they’ve been paying out in December since 2008.

Consequently, many sites show Espy’s dividend yield as being below 4%, when it’s actually ranged from around 8% to well over 12% since 2008. The table below simply uses the year ending stock prices to determine dividend yields, but you could check on the yearly price ranges to come up with more data. 2008 also had another special dividend in March, which hasn’t been repeated:

(ESP is listed in the Industrials section of our High Dividend Stocks by Sector Tables.)

Even Yahoo, which has Espy’s dividend history correct, shows a current yield of only 3.60%. Why are the sites listing it incorrectly? Because it’s a “special dividend”, and there’s no guarantee of it happening each year.

So, will they pay it again in 2012? The special dividend is based on financial results for the most recent fiscal year, which ends on June 30th, and capital requirements for the current year. They’ve supported their dividends by paying out 90% of earnings and also using some Retained Earnings. Management prefers to reward shareholders, by utilizing some retained earnings, instead of earning next to nothing on this excess cash.

Judging by Espy’s earnings and current record order backlog, prospects look good for another $1.00 dividend in 2012, particularly as ESP already ramped up its manufacturing capabilities last year, in order to meet increasing demand. ESP’s order backlog grew by over 31% for its fiscal year ending 6/31/12, to $50.8 million.

Earnings Growth: Using the 2 lowest past Order Backlog-to-Sales Conversion rates, and the lowest Net EPS %, we came up with a fiscal 2013 EPS range for Espy of $2.17 to $2.43:

These 2 estimates translate into a 2013 PEG ratio ranging from a very low .55, up to 1.34.

Technical Buy Signal: In addition to most likely being undervalued on a PEG and P/Book basis, ESP just crossed above the oversold line on its Stochastic chart, which is seen as a buy signal by technical analysts:

Options: There are no call options or put options available for ESP.

Financials/Valuations: Excepting ROE, Espy’s ratios outshine the Defense industry averages, and it also looks undervalued on a Price/Book basis.

Company Profile:Espey Mfg. & Electronics Corp, located in Saratoga Springs, NY, is a Power Electronics Design and Original Equipment Manufacturing (OEM) company with a long history of developing and delivering highly reliable products for use in military and severe environment applications.

Espey’s primary products are power supplies, power converters, filters, power transformers, magnetic components, power distribution equipment, ups systems, antennas and high power radar systems. The applications of these products include AC and DC locomotives, shipboard power, shipboard radar, Airborne power, ground-based radar, and ground mobile power.

Espey is on the eligible list of contractors on the United States Department of Defense and generally is automatically solicited by such agencies for procurement needs falling within the major classes of products produced by the company. (Source: Espy website)

Disclosure: Author was long ESP shares at the time of this writing.

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

A High Dividend Stock That’s Ready To Rise

Posted on September 7, 2012

by Robert Hauver

Looking for cheap high dividend paying stocks? MV Oil Trust, (MVO), has shown a recurring pattern of price troughs that rise into peaks as it approaches its quarterly ex-dividend dates, which fall around the 12th of January, April, July, and October. It recently crossed back above the oversold line on its stochastic chart:

Dividends: With its 11%-plus dividend yield, MVO sits atop the Energy section of our High Dividend Stocks By Sector Tables. By law, trusts are required to pay out at least 90% of their income in distributions, in return for not paying taxes. MVO’s next ex-dividend date should be around October 12th. (Trust dividends are referred to as distributions.)

Dividend History: MVO will need to pay out at least $.76 in October, to keep pace with its 2011 payout level. Judging by its earnings, (see below), this should be achievable.

Earnings: MVO is one of only of a handful of energy trusts which had strong earnings growth in 2011, (up over 25%), and in the most recent quarter. As noted below, MVO earns royalties from assets which are 98% oil, vs. only 2% natural gas, hence its advantage over natural gas trusts, many of which had been hurt by plummeting prices.

Profile: MV Oil Trust was formed in August 2006, by MV Partners, LLC. MV Partners conveys a term net profits interest to the trust that represents the right to receive 80% of the net proceeds from all of MV Partners’ interests in oil and natural gas properties, which are located in the Mid-Continent region in the States of Kansas and Colorado. As of June 30, 2006, the underlying properties produced predominantly oil from approximately 985 wells, and the projected reserve life of the underlying properties was in excess of 50 years.

Production from the underlying properties for the year ended December 31, 2005, was approximately 98% oil and approximately 2% natural gas and natural gas liquids. The underlying properties are all located in mature fields that are characterized by long production histories and numerous additional development opportunities to help reduce the natural decline in production from the underlying properties.

The net profits interest will terminate on the later to occur of (1) June 30, 2026, or (2) the time when 14.4 MMBoe have been produced from the underlying properties and sold (which amount is the equivalent of 11.5 MMBoe in respect of the trust’s right to receive 80% of the net proceeds from the underlying properties pursuant to the net profits interest).

Options: There are no put options or call options available for MVO.

Disclosure: Author had no positions in any of the stocks mentioned in this article at the time of this writing.

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

Cisco – A Tech High Dividend Stock That’s Still Undervalued

Posted on August 16, 2012

by Robert Hauver

After getting bashed in the 2nd quarter, Cisco Systems, (CSCO), stock has done well this summer, gaining over 17% since the June lows. CSCO is also one of the top 4 DOW 30 performers over the past trading month, gaining 6.90%, and trailing only HD, CAT, and IBM, which leads the DOW pack with an 8.49% gain. Even with its big summer gains, CSCO still trails the market year to date:

Thanks to a stronger fiscal 4th quarter earnings report, in which adjusted EPS rose 18% vs. fiscal Q4 2011, Cisco’s full year 2012 EPS growth also looked good. In fact, one could argue that CSCO is still undervalued on a 2012 PEG basis. Looking forward, the consensus for 2013 calls for 10.81% EPS growth, which puts CSCO a bit over the 1.00 PEG threshold for being undervalued.

However, using the consensus future earnings growth rate of 8.09%, with a risk-adjusted 10.41% discount rate, shows CSCO’s estimated value to be approximately $23.25, indicating that CSCO is currently undervalued by well over 20%.

Dividends: After having joined the universe of dividend stocks in 2011, CSCO is now approaching the arena of Tech high dividend stocks. CSCO just ratcheted up its quarterly dividends big time, by announcing a huge 75% increase, going to $.14, from $.08. This is the second increase in 2012 – CSCO increased its dividend in the 1st quarter to $.08, from its initial $.06 payout. This new higher dividend payout ups CSCO’s dividend yield significantly, to just below 3.00%, which is in the higher range for most Tech stocks:

Options Outlook: If you’re interested in pumping up CSCO’s dividend yield even further, you can gain additional immediate income via selling covered calls. Since the $19.00 call strike price is only $.13 above CSCO’s mid-day $18.87 price, it appears that you would risk having your CSCO shares assigned/sold before you collect one or both of the $.14 quarterly dividends before the Jan. 2013 expiration.

However, your Assigned compensation would be much more than the dividends anyway: $1.11 in call premium now, plus $.13 in assigned price gain, for a net gain of $1.24, a 6.57% gain. If your shares were assigned near the October ex-dividend date, in under 2 months, this would equal a 39%-plus annualized yield approximately. Conversely, if your shares are never assigned, the minimum yield you’d make would be a 17.57% annualized static yield.

You can see more info on over 30 other call trades in our Covered Calls Table:

Here’s a look at where CSCO is at price-wise over the past 52 weeks. With a very strong relative strength of 72.39, you certainly can’t say that CSCO is oversold:

Cash Secured Puts: Given CSCO’s recent big rise, a cautious way to still profit would be to sell cash secured put options. This January 2013 put gives you a break-even price of $17.52, in addition to offering an annualized yield of over 18%, over 5 times the dividend amount.

You can see more info on over 30 other call trades in our Covered Puts Table:

Financials: As Cisco is such a dominant player in its industry, industry comps are a bit dicey. However, these comps do include other large firms that compete with Cisco in certain areas, such as Juniper, (JNPR), Alcatel-Lucent, (ALU), and Hewlett Packard, (HPQ):

Disclosure: Author was long CSCO shares and short CSCO puts at the time of this writing.

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

Cummins Is Bouncing Back But Is Still Undervalued

Posted on August 3, 2012

by Robert Hauver

If you’re looking for dividend stocks that bounce back and forth in a trading range, Cummins may be one of the best stocks to buy or trade for this attribute.

Cummins, (CMI), had a rough time after lowering its 2012 revenue forecast on July 10th, down to flat, from a previous 10% estimate. CMI shares reached as low as $82.20, but since then, have rallied nearly 18%:

Click here to read more…

Disclosure: Author was short CMI put options at the time of this writing.

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

3 Basic Materials Dividend Stocks Trouncing The Market

Posted on July 28, 2012

By Robert Hauver

Basic Materials had been getting pummeled in 2012, for a number of reasons, chiefly the slowdown in the world economy, particularly China, and a strong dollar. This sector is the worst performing sector so far, down 0.6% in 2012:

However, over the past month, this sector has outperformed all others, thanks to a falling dollar, and renewed stimulus from the Chinese government. Click here to read more…

Standard Motor Parts Has Very High Options Yields

Posted on July 20, 2012

Standard Motor Parts, (SMP), had been beaten up after its disappointing 2nd quarter earnings release on May 3rd, but the market has gotten much more revved up about this Industrial dividend stock this summer. SMP received an analyst upgrade in early June, which certainly helped its share price:

Maybe this is why – even after its recent price gains, SMP still looks very undervalued on PEG basis.

Click here to read more…

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