The Top Dow Dividend Stocks For First Quarter 2012 Earnings

By Robert Hauver

25 of the 30 Dow Jones Industrials have reported 1st quarter 2012 earnings so far. 18 firms have reported positive growth, and 7 have reported negative growth, with the range running from Boeing, (BA), with 54% year-over-year 1st quarter growth, down to beleaguered Bank of America, (BAC), with -82%. These 2 Dow dividend stocks reported the best 1st quarter 2012 earnings growth year-over-year:

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

Author: Robert Hauver © 2012 Demar Marketing All Rights Reserved

These Dow Dividend Stocks Are Bucking The April Pullback

By Robert Hauver

It’s been a rainy April for the market thus far, with the S&P down almost -3.00% through 4/19/12. Being  optimistic, we went searching for dividend paying stocks that are bucking the new market pullback.  We found 2 contenders, Caterpillar, (CAT), and Home Depot, (HD), that have held their own in this month’s market decline, and have also done well in recent rallies:

CAT-HD-PERF

HD beat CAT in the Nov. 2011 pullback, and has also had stronger share performance year to date and during this month’s decline.

Valuations & Earnings Growth: CAT derives a lot of its profits from overseas, vs. Home Depot’s mostly domestic focus on the US home market. Subsequently, CAT has had stronger earnings growth in its most recent quarter and fiscal year, as the hobbled US consumer slowly picks up spending, and the home market remains weak. Although it’s up over 18% this year, CAT still looks more undervalued on a PEG basis than HD.

CAT-HD-PEG

We’ll find out if CAT’s current EPS projections hold, when it reports earnings, on its upcoming April 25th morning conference call next week. (Judging by how far off analysts have been in their CAT estimates in recent quarters, it should be an interesting report.)

CAT-ANLYSTMISSES

Dividends: Although CAT and HD aren’t high dividend stocks, both firms have a 5-year dividend growth rate that’s above their industry avgs.: CAT’s is 9.62%, and HD’s is 9.03%. CAT’s dividend payout ratio is more conservative than its industry avgs., while HD’s is much higher than its industry’s low avg. of 26.4%:

CAT-HD-DIVS

Covered Calls: Combining covered call options with dividend stocks is a powerful way to create much more immediate income than many stocks’ dividends offer over 1 – 3 quarters.  The increase in income is particularly high in a stock like CAT, which has high options yields that dwarf its dividend yield.  The tradeoff is that you may forgo potential future price gains, in return for being paid a call option premium now.  CAT has a higher beta and more volatility than HD, which gives it higher options yields.

In this trade, CAT’s August $110.00 call options pay well over 12 times its $.46 quarterly dividend.

CAT-HD-CALLS

If CAT is above $110.00 at or near expiration in August, your shares will be sold/assigned for $110.00, no matter how much higher CAT rises.  You’ll receive an additional $2.64/share in price gain, for an additional assigned yield of 7.54% annualized, and the total potential assigned yield is 25.86%. ($110.00 strike price – $107.36 stock cost = $2.64/share.)

How does this compare to just buying CAT outright at $107.36? Since you received a call premium of $5.95, at a strike price of $110.00, your maximum price point potential is $115.95.  If CAT doesn’t go as high as $115.95 during this 4-month term, you’d be ahead by selling this covered call.

(Each option contract corresponds to 100 shares of the underlying stock.)

The 3 income streams in this covered call trade are, (for 1oo shares of stock bought and 1 call option sold):

1. Call premium of $5.95/share, (paid within 3 days of the trade): $595.00

2. Quarterly dividend of $.46/share, (paid in August, ex-dividend date in July): $46.00

3. Potential assigned price gain of $2.64/share, if CAT is above $110.00 at or near expiration: $264.00

(You can see more details for over 30 other high options yields trades in our Covered Calls Table.)

Technical Data: CAT and HD have been two of the best stocks to buy for price gains over the past year:

CAT-HD-TECH

As the table above shows, both of these stocks are quite close to their 52-week highs, which leads us to another, more conservative options strategy – selling puts.

Cash Secured Puts: By selling cash secured puts below a stock’s current price, you’ll achieve a lower break-even price, and also get paid within 3 days of making the put sale. However, you won’t qualify for any dividends, but, as you can see, the put options listed below pay out over 6 to 14 times what these quarterly dividends pay.

For every put option that you sell, your broker will secure enough cash in your account to purchase 100 shares of the underlyng stock, at whatever the put option’s strike price is, hence the name “cash secured puts”. In the CAT put option trade below, the broker would hold $10,500.00, (100 times the $105.00 strike price).

There are more details on these and over 30 other high yield Cash Secured Puts trades in our Cash Secured Puts Table.)

CAT-HD-PUTS

Financials: Both firms’ metrics are far above their industry avgs, except for CAT’s higher debt load. However, CAT has an interest coverage ratio of 6.4.

CAT-HD-ROE

Disclosure: Author is short Caterpillar put options.

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

Author: Robert Hauver © 2012 Demar Marketing All Rights Reserved

Analysts Are Clueless About These Dow Dividend Stocks

By Robert Hauver

Earnings season is on a roll, and traders are playing the old “earnings estimates beats/misses” game, which often has tenuous ties to reality, at best, as analysts go from being over-excited to being overly pessimistic.  Here’s just how wrong analysts have been about Caterpillar over the last 4 quarters:

CAT-ANLYSTMISSES

Could it be that CAT is just a special case?  Not really – analysts were even more clueless about Boeing.  Can you just imagine, (I shudder to think), if you were to submit an estimate to your boss that was off by over -80%, and then followed up that brilliant piece of work with another estimate that was off by over -30%?   Do you think it might possibly prompt a reassignment or even a permanent vacation?  Not so on Wall St. – where being consistently and often egregiously wrong is OK.

Why is that?  Because it supports the trading excitement of “Earnings Beats & Misses”.  Just think about it, the market often bases its decisions on the estimates of a group of external people, who don’t have access to the daily, inside info of the stocks they’re supposed to be informing us about.  If this sounds like folly, it often is:

BA-ANLYSTMISS

Instead of just listening to analysts “pie in the sky” or “gloom and doom” predictions, try looking at what companies actually earned each quarter vs. a year ago:

BA-CAT-EPS GROWTH

We can also look at their quarterly Revenue Growth vs. a year ago:

BA-CAT-SALES

CAT has been one of the best stocks to buy in 2012 and in 2011 for price gains, but Boeing shares haven’t risen nearly as much. Here’s one reason why.  BA is forecasting lower 2012 earnings per share, of $4.05 to $4.25, vs. 2011’s $5.33 EPS, whereas CAT is forecasting continued strong growth. Even though BA has a record order backlog, unlike other companies, they can’t rush their highly technical products to market.

BA is forecasting just $4.05 to $4.25, but analysts are estimating $4.46/share 2012 EPS, AND, guess what?  Analysts are currently forecasting EPS of $5.67 for BA in 2013, which is 6.4% over BA’s 2011 earnings. Do you believe them?:

CAT-BA-PEG2012

How can a value investor take advantage of Analysts’ mistakes?  By waiting for the analysts’ next overheated incorrect estimate, which may be so ridiculously high that even a company posting strong gains can’t “beat” it, which is what happened with CAT in 2011, when analysts had somehow not factored in the expenses of CAT’s multi-billion dollar purchase of mining equipment maker Bucyrus.

When the stock gets beaten up, and discounted unnecessarily, make your move, and buy it, OR, do this:

Sell Cash Secured Puts: If you want to give yourself more breathing room, you can sell  cash secured put options below the stock’s current price, which will give you a lower break-even price. 2 other important benefits:  you’ll get paid now to wait, and you’ll often get paid much more than the next few quarters’ dividends.  Fortunately, CAT has rather high options yields which are much higher than its dividend yield.

In these two examples, CAT’s put options pay over 9 to 12+ times the amount of its dividends. The further out in time you sell options, the more premium you’ll get paid, and the lower your break-even price will be.  However, your annualized yield will also be lower, because your broker will be holding a cash reserve of 100 times the Put Strike Price in your account against each Put that you sell, until the put expires or is assigned or you buy it back to close out your position.

(You’ll find more info on these and over 30 other high yield Cash Secured Puts trades in our Cash Secured Puts Table.):

CAT-PUTS-2-23-12

How to hedge your gains with Covered Calls: Conversely, if you now own CAT shares, and you’re leery of a market pullback, selling covered call options will protect some of your profit, by giving you additional option income on your shares. The caveat is that, by selling a call option, you’re obligating yourself to sell your shares at whatever strike price you sell the calls at. Typically, the shares will get assigned near or at expiration, if the stock rises above the strike price.  So, you’re foregoing potential price gains, in return for immediate option income.

However, these 2 covered call trades each have strike prices above CAT’s current stock price, offering you the potential for an additional $3.80/share in price gains, if your shares get assigned. The longer-term August call options pay more than the May calls, and both call options heavily outstrip the corresponding dividend payouts. (One options contract corresponds to 100 shares of stock.)

(You can see more details for these and over 30 other lucrative option trades in our Covered Calls Table.):

CAT-CALLS-2-23-12

Financials: Although they aren’t high dividend stocks, these two DOW dividend stocks both have attractive Mgt. Ratios, and good interest coverage, but if you’re looking for 2012 growth at a reasonable price, CAT is the more undervalued of the two.  In fact, CAT is one of the few DOW 30 stocks to have a low 2012 PEG ratio. However, as CAT has risen almost 29% year-to-date, you may want to wait for a pullback before jumping in.

BA-CAT-ROE

Disclosure:  Author is short CAT put options.

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

Author: Robert Hauver © 2012 Demar Marketing All Rights Reserved

Make Over 20 % By Hedging This Top Dow Dividend Stock

By Robert Hauver

Although it’s nearly flat for the past year, the Industrial sector has been rising strongly over the past few months:

SECTOR-PERF-1-19-12

Promising earnings forecasts are one of the main reasons for this sector’s momentum, as it’s projected to be one of the top sectors for EPS growth over the next 5 years:

SECTOR-PEG-1-19-12

So far, Caterpillar, (CAT), has been one of the best stocks to buy in 2012 for price gains. If you bought CAT in late 2011, you’d have a nice gain already:

CAT-PERF-1-19-12

Although the market has been climbing so far in 2012, many analysts are forecasting a volatile road ahead in the first half of 2012.  So how can you protect your gains in CAT?

Fortunately, CAT has some of the highest options yields of any Dow dividend stocks, which will help you to protect a large % of your gains, via selling covered calls.

Different strategies you can use to hedge your gains and earn high yields:

1. Sell covered call options further out in time, to capture a bigger premium, and hedge more of your gains. This table uses CAT’s 2011 year-end price as a cost basis, and illustrates how, the further out in time you sell these $105.00 call options, the more option premium $ you’ll receive.

In the table below, the May option pays $7.50, which hedges almost 50% of the $15.11 year-to-date gain for CAT, whereas the Jan. 2013 option pays $13.65, which hedges over 90% of the gain. The higher, longer-term call premiums will also lower your break-even price.

The trade-off is that your annualized yields decrease as you sell further out in time. However, all of these trades achieve double-digit annualized “static yields”, and much higher potential assigned yields.  Static yield equals the call bid premium dividend by the cost basis of the underlying stock, and refers to a scenario in which the stock doesn’t rise above the strike price near expiration, so you keep the underlying shares:

CAT-EXPS-2012-01-19

(You can see more details on over 30 high yield Covered Call trades which we’ve discussed in recent articles in our Covered Calls Table.)

2. If you’re more bullish on the market and/or CAT, you could sell covered call options at a higher strike price, leaving yourself more opportunity for future price gains.

The table below uses CAT’s 1/19/12 closing price as a cost basis, and shows the differences in potential price gains at different strike prices, all expiring in August 2012.

Potential assigned yield refers to the yield on the difference between the stock’s price and the strike price.

In this example, the $105.00 strike price is $.71 below CAT’s $105.71, so if the stock rises above $105.00 near expiration time in August, the underlying shares may get sold/assigned away from you at $105.00.  This is the big trade-off of selling covered calls at a strike price “in the money” – you sacrifice potential future price gains for a higher option payment now.

The other two higher strike prices leave you more room for potential price gains/higher potential assigned yields, but pay lower call option premiums:

CAT-STRIKES-2012-01-19

The above call options pay almost 6 to over 10 times the amount that CAT’s dividends pay during this 7-month trade period.

Selling Cash Secured Put Options:

Conversely, if you’re interested in buying CAT, but you’re leery of its current price, you can sell cash secured puts at a strike price below CAT’s current price, and achieve a lower break-even price.

Selling put options obligates you to potentially have to buy the underlying stock at whatever strike price you sell the puts at.  “Cash reserve” refers to the amount your broker will set aside in your account, to insure that you have the money to pay for the stock, if it gets sold/assigned to you at expiration. For example, the $105.00 strike price requires a cash reserve of $10,500.00, which equals $105.00 x 100 shares of CAT.  (Each option contract corresponds to 100 shares of the underlying stock)

In these August 2012 put options trades, each lower strike price gives you a lower break-even, but also has a lower option premium.  So, you have to decide how aggressive to be – should you “nibble at the edges”, and sell put options further out of the money for a lower break-even, such as the $97.50 strike price below, OR, be more aggressive, and sell at a strike price closer to a stock’s current price, such as the $105.00 strike?:

CAT-PUTS-1-19-12

(Note: You can find more info on over 30 high yield Cash Secured Puts trades in our Cash Secured Puts Table.)

Financials: CAT’s mgt. efficiency ratios are higher than its peers’.  CAT’s Debt/Equity ratio is higher, but it has an Interest Coverage ratio of 5.9:

CAT-ROE-1-19-12

Valuations: Although CAT’s Price/Book is much higher than its peers, it appears undervalued on a PEG basis, and has enjoyed solid growth during its most recent quarter and fiscal year.  CAT is due to give its earnings report on Jan. 26, 2012.

CAT-PEG-1-19-12

Disclosure: Author is short CAT put options.

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

Author: Robert Hauver © 2012 Demar Marketing All Rights Reserved