A Major Oil High Dividend Stock With Undervalued Growth

By Robert Hauver

Are there any “bargain basement” high dividend stocks with strong financials, undervalued earnings growth, and future dividend growth? Surprisingly, British Petroleum, (BP), an energy stock that many investors dumped, after its Gulf oil spill debacle, looks like one of the best stocks to buy once again for these attributes.

Investors have been shunning Big Oil stocks for the past year, so this sub-industry group as a whole is down a bit over -1%. However, unlike two of its larger peers, Chevron, (CVX), and Exxon, (XOM), BP has actually been getting support from institutional buyers in the past few months. Technically speaking, BP is also in the upper region of oversold territory, with its RSI of 35.14:

BP-CVX-XOM-PERF

A lot of this new support has to do with BP’s improving earnings and low valuations.  BP has logged strong EPS growth in its most recent fiscal year, and recent quarter. Surprisingly, BP’s sales growth over the past 5 years topped both Exxon and Chevron, and was just above industry averages.  Although BP is only projected to grow 6.36% in its next fiscal year, its very low P/E gives it an enticing PEG ratio:

BP-PEG

Dividends: After the 2010 Gulf spill, BP needed to eliminate its $.84 quarterly dividend payout for the balance of 2010, but then reinstated in 2011, at 50% less, ($.42/quarter). In 2012, BP has been able to increase its quarterly dividends, for the first time since the spill, raising them over 14%, to $.48/share. BP has been a cash machine for a long time, and as it works through the Gulf settlement payouts, its cash flow will only get even better.

BP foresees future dividend increases, as it stated earlier in 2012: “With operating cash flow generated by BP in 2011 reaching some $22bn – over 60% higher than in 2010 – CEO Bob Dudley confirmed the company’s expectation that net cash flow in 2014, in a $100 oil price environment, would be around 50% higher than in 2011. Half of the additional cash is expected to be used for re-investment and half for other purposes including increased shareholder distributions. 2012 will be a year of increasing investment and milestones as we build on the foundations laid last year. As we move through 2013 and 2014, we expect financial momentum will build as we complete payments into the Gulf of Mexico Trust Fund, restore high-value production and bring new projects on stream.” (Source: BP website)

BP’s dividend yield is now above those of CVX and Exxon, and is also above industry averages:

BP-CVX-XOM-DIVS

Covered Calls: Many income investors have begun selling covered call options in order to increase their income from dividend paying stocks. This options trading strategy is an easy way to double, or even quadruple your dividends, depending on the stock.

If you already own the stock, you can then sell 1 call option contract for each 100 shares that you own. (One option contract corresponds to 100 shares of the underlying stock.)

If you don’t own the stock, here’s the sequence for selling covered calls on dividend stocks:

1. Buy the stock, in 100 share lots – example, buy 200 or 300, instead of 250 shares.

2. Sell 1 call option contract for each 100 shares that you own, at a strike price above the stock’s current share price. The further above the share price you sell, the less premium you’ll receive. The further out in time you sell, the more premium you’ll receive, which will lower your break-even. You receive this option $ within 3 days of selling, often even the same day.

3. Collect whatever quarterly dividends are due, as they pass their ex-dividend dates.

4. At expiration time, if the stock has risen above the strike price, your shares will be sold at the strike price, and you’ll also pocket the difference between the strike price and your cost per share.  If the stock isn’t above the strike price then, the call option will expire, leaving you with the initial call premium $ that you received, plus your dividends, as your profit.

These BP Oct. 2012 call options pay nearly 3 times the amount of BP’s 2 quarterly dividends during this 7-month period. This $45 Oct. 2012 call option also holds a potential assigned yield of 2.66% annualized, ($.65/share, the difference between the $45 strike price and BP’s $44.35 share price.)  The catch is that your BP shares will be sold/assigned at or near expiration time, if BP rises above the $45 strike price.

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

BP-CALLS

Cash Secured Puts: If you’re still wary of BP’s gulf spill headline exposure, an alternative options trading strategy would be to sell cash secured put options, and literally “get paid now to wait”.

The BP OCT. $44.00 put option, which is below BP’s share price, would pay you $3.65/ share, ($365 per option contract). This gives you a lower break-even price, of $40.35.

High Options Yields: This put option pays out 3.8 times what BP’s dividends pay over the next 7 months. In addition, you’ll receive your options premium $ within 3 days of making the trade, often even the same day, so you’ll have the use of this $ now, instead of waiting for the quarterly dividends.  (Note: Put sellers don’t receive dividends.)

If BP is below $44.00 at or near the Oct. expiration, you’ll be sold/assigned 100 shares of BP, for every put contract that you sold.  However, your net cost will only be $40.35, ($44 strike price, minus the $3.65 put bid premium you received when you sold the put).

(You can find more info for this trade and over 30 other high yield Cash Secured Puts trades in our Cash Secured Puts Table.)

BP-PUTS

Financials: While they aren’t quite as impressive as some of Chevron’s and Exxon’s figures, BP’s financial metrics are all above industry averages, with the exception of its operating margin. Although BP’s Debt/Equity ratio is higher than CVX and XOM, BP has a very high Interest Coverage figure of 31.8:

BP-ROE

Disclosure: Author is long shares of BP and XOM, and is short BP 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

3 Major Oil Dividend Stocks With High Options Yields

By Robert Hauver

Looking for ways to play $100+ per barrel oil?  The Energy Sector has many dividend paying stocks, in fact, many of them are listed in the Energy section of our High Dividend Stocks By Sector Tables. Although most of the Major Integrated Oil stocks don’t have such high dividend yields, there are some that can still give you double digit high options yields, via selling covered call options and cash secured puts. We found 3 Oil dividend stocks with attractive mgt. metrics, good margins, and good growth prospects for 2011:

Conoco Phillips, (COP), PetroChina, (PTR), and, the big kahuna, Exxon Mobil, (XOM). Here’s how these 3 firms compare vs. their peers in the Oil Majors group:

ROE-XOM-COP-PTR2011-02-24

Conoco has the lowest margins of this group, due to its heavier exposure to refining, a lower margin part of the oil biz.  However, Conoco has been divesting poor-performing assets, and is moving to concentrate more on exploration and production, which should improve margins.  Two other factors favor COP’s future earnings: 1. COP has a higher proportion of natural gas than its peers and should benefit from environmental concerns that favor natural gas. 2.  COP also has significant ownership in pipeline and other transportation assets, which offer steady income that is not as tied to variations in commodity prices. (Source: Morningstar)

PetroChina, China’s largest oil and gas company, looks to secure future domestic and international supply to feed a nation hungry for energy. Refining operations lost money over the past few years as the price of crude oil soared while the price for refined products in China remained stagnant, due to government controls. Now, the Chinese government will revise product prices if oil prices fluctuate over a given period of time. The new system should improve refining margins. (Source: Morningstar)

ExxonMobil sets itself apart among the other supermajors as a superior capital allocator and operator. Resource nationalism is becoming an increasingly greater challenge to international oil companies’ (IOC) ability to grow production. Countries rich in oil and gas reserves are increasingly picky when choosing partners, such as Exxon, to work with their national oil companies (NOC) to explore for, produce, and transport to market their oil and gas reserves. With its deep pockets, expertise, and integrated operations, Exxon can tackle nearly any mega-project regardless of scale, location, or operational difficulty. (Source: Morningstar)  In addition, Exxon’s purchase of XTO positions it as a major player in the growing utilization of natural gas, which Exxon predicts will overtake coal as the 2nd most utilized fuel source in the coming years.

Looking ahead to 2011 earnings, Conoco and PetroChina appear undervalued:

XOM-COP-PTR-PEG-2011-02-24

While XOM’s 2011 PEG is over 1, it generally commands a premium to its peers in the market, hence the higher P/E and PEG’s.

Here’s how you could lock in high option yields now, by selling Covered Call options:

XOM-COP-PTR-CALLS-2011-02-24

Note how the above call options are approx. 3 times the price of the dividends. Another positive to the Covered Call and Cash Secured Put options strategies is that you receive the option premium $ within 3 days of selling calls and puts, as opposed to waiting for each quarterly dividend. The flip side, is that your participation in possible future price gains is limited to your potential assigned yield – (the difference between the strike price and the stock’s cost basis).  Our Covered Calls Table can give you more info about these and other Covered Call options trades.

Conversely, if the current high market prices make you nervous, you could also earn high options yields by selling Cash Secured Puts for any of these stocks, thereby receiving much more $ from their put options, than their current dividend yield will earn you. You’d also have a lower break-even price:

XOM-COP-PTR-PUTS2011-02-24

There’s more info about these and other put options trades in our Cash Secured Puts Table.  (Note: Put option sellers don’t receive dividends, we listed the dividends for comparison only .)

Disclosure: Author is long XOM shares, and may be short COP puts in the near future.

Disclaimer: This article is written for informational purposes only.

Dividends vs. Puts – A Short Term Profit Strategy – Aug. 29, 2009

By Robert Hauver

With the S&P 500 up over 50%, and the Dow up over 45% since March 9th, many investors are still on the sidelines, chewing on sour grapes, and still wondering if this incredible rally is going to last.

What can you do if you got left behind by the current rally, but still want to make a profit?

Click here to find out…