By Robert Hauver
After being the worst sector in 2011, and losing over -17%, Financial stocks are among the best stocks to buy in 2012 for price gains thus far, beating all other sectors. Even with this major turnaround, Financials are still down -2.3% over the past year:
Part of the recent momentum for Financials came from the Greek debt agreement being signed, and improving US economic data. Another major plus was the Fed’s mainly successful stress tests for major banks this week, but the big impetus is that this sector had much better 2011 4th earnings, even though its sales growth was flat:
(Data Source: Standard & Poors)
Which Financial sector dividend paying stocks are the big boys buying? It looks like some of the brokerage firms and one exchange are getting institutional support, particularly this small cap stock, Interactive Brokers, which is just -3% below its 52-week high, but only up 10.79% for the past year:
Dividends: Although these dividend yields aren’t as high as some of the High Dividend Stocks we often write about, they all have above-average dividend yields for their industry. In addition, you can improve upon these dividend payouts dramatically by using options trading strategies, such as selling covered call options, (see further below). *CME also had a special $3.00/share dividend that went ex-dividend in March, and increased its quarterly payouts by 22%, to $1.40, from $1.15, in 2011.
Valuations: So, why are Institutional buyers so supportive of IBKR? Many reasons: IBKR has a very low PEG ratio, outstanding yearly and quarterly EPS and Sales growth, and its Price/Book and Price/Sales valuations are way below industry averages. CME also has a low PEG, low Price/Book , and good EPS growth, but buyers are probably worried about potential future gov’t regulations for exchanges, stemming from the MF Global scandal. Schwab’s PEG is also low, but like CME, its recent quarterly sales slowed vs. Q4 2010:
Financials: All of these stocks have above-avg. industry Mgt. Efficiency Ratio and Operating Margins, and carry a lot less debt than the industry average. IBKR and Schwab go head to head in the online discount brokerage segment, but IBKR has a much higher operating margin:
Covered Calls: If you’re looking to earn more income now from these dividend stocks, but still participate in some potential price gains, selling covered call options above the stock’s current price is one way to go. Covered Call sellers get paid an often lucrative call premium now, in return for committing to potentially have to sell the underlying stock at a given strike price by expiration time. (Each option contract corresponds to 100 shares of the underlying stock.)
If you’re more bullish on a stock, you’d sell covered call options further above its current price/share, but you’ll give up some immediate call option $ now for potential future price gains down the road. In all of the trades below, the call option premiums are up to 7 times the dividend payouts. (Annualized potential assigned yield equals the difference between the strike price and the stock’s share price, divided by the share price.)
The Annualized Total Potential Assigned Yields listed below are comprised of 3 income streams. The $ amounts for CME are:
1. Dividends: $2.80/share, ($280.00 per option contract sold). You’d collect 2 quarterly $1.40/share dividends.
2. Call option premiums: $18.80/share, ($18.80 per option contract sold). You’d get paid this $ within 3 days of selling the call options, often even the same day.
3. Potential Assigned Price Gains: $3.75/share, ($375.00 per option contract sold). This usually occurs at or near expiration time.
(You can discover additional details for this and over 30 other high options yields trades in our Covered Calls Table.)
Cash Secured Puts: SInce these stocks have rallied so much in 2012, you may wish you could turn back the clock and dive in at a lower price. One way you can do this, is by selling cash secured put options at a strike price below the stock’s current price. You’ll be paid a put premium that is often much higher than the stock’s dividends over the next 2-3 quarters, in return for committing to buy the stock at the put strike price. For example, in the 2 put trades below, these puts pay over 7 to 9 times what the dividends pay. (We listed the dividends for comparison sake only – put sellers don’t receive dividends.)
In the SCHW trade below, you’d be paid $1.10 for committing to potentially buy SCHW at $15.00 by Sept 22, 2012, if SCHW’s price goes below $15.00 at or near expiration time. But, if you end up buying SCHW at $15.00, your cost will only be $13.90, (the $15.00 strike price, less the $1.10 you were paid for selling the put option.
(You can find more details on these and over 30 other high yield Cash Secured Puts trades in our Cash Secured Puts Table.)
Interactive Brokers (IBKR): Over the last 35 years, IBKR has grown internally to become one of the premier securities firms with over $4 billion in equity capital following payment of a special cash dividend of approximately $1 billion pre-tax.
Interactive Brokers conducts its broker/dealer and proprietary trading businesses on over 90 market destinations worldwide. In its broker dealer agency business, IB provides direct access (“on line”) trade execution and clearing services to institutional and professional traders for a wide variety of electronically traded products including stocks, options, futures, forex, bonds, CFDs and funds worldwide. In its proprietary trading business, IB engages in market making for its own account in about 6,500 different electronically traded products. Interactive Brokers Group and its affiliates execute nearly 1,000,000 trades per day. (Interactive Brokers was named #1 online broker again in 2011 by Barron’s.)
CME Group (CME): An exchange which builds on the heritage of CME, CBOT, NYMEX and COMEX, CME Group serves the risk management needs of customers around the globe. CME provides the widest range of benchmark futures and options products available on any exchange, covering all major asset classes.
Charles Schwab (SCHW): Launched in April, 1971, as First Commander Corporation, to conduct a conventional broker-dealer securities business and publish the Schwab investment newsletter, Schwab grew to become one of the leading discount brokerage firms, focusing on individual investors.
Author holds no shares of any stocks mentioned in this article at this time.
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