By Robert Hauver
With the S&P 500 up over 8% year-to-date, finding undervalued dividend paying stocks has become more of a challenge, but we did find two, hiding in plain sight, in the resurgent US auto industry, of all places. It’s been a bit over 3 years since we generous taxpayers bailed out the Auto industry, and now it appears that Ford is finally on a growth path, and GM is also projected to grow its earnings in 2012, after a Q4 2011 EPS slowdown. Both of these firms had impressive year-over-year EPS growth, as did the overall auto industry.
Take a look at these very low P/E’s – 2.44 for Ford, and 5.43 for GM, which, coupled with their strong growth forecasts for 2012, give these 2 stocks some of the lowest PEG ratios currently seen in the market:
Dividends: Ford just rejoined the world of dividend stocks in 2012, reinstating its quarterly dividend, after a 5-year-plus gap. GM says it hasn’t any plans to reinstate its common share dividends, but GM does have this to offer: 4.75% Series B Mandatory Convertible Junior Preferred shares, which pay a $.59375/share quarterly dividend. These preferred shares are trading at $41.54, a 17% discount to the par $50.00 call price, and offer a 5.72% dividend yield.
GM’s Preferred B shares must convert on 12/1/2013 into a varying amount of GM common shares, based upon these formulas:
A. 1.2626 common shares per preferred unit, if GM’s common stock is equal to or more than $39.60; OR,
B. 1.5152 common shares per preferred unit, if GM’s common shares are at $33.00 or less.
Here’s the rub: at GM’s current $25.14 price/common share, the conversion would equal just $38.09, a $3.45 conversion shortfall to the preferred shares’ current price of $41.54. So, GM’s common stock would have to rise to $27.42 to break even at conversion time in Dec. 2013.
Alternatively, it would take collecting approx. 6 quarterly dividends, through 9/1/12, to overcome the $3.45 shortfall. A third, and more profitable outcome would be if GM rises past $27.42 and you collect the quarterly dividends in the meantime.
You can find the GM preferred shares listed on Yahoo Finance with the ticker, GM-PB. Financial and brokerage websites seem to love making preferred shares as confusing as possible, by giving them varying symbols. There’s also not a lot of backup info, such as dividend history and terms, on the web for preferreds. However, preferred shares can be a lot less volatile in times of market volatility.
Covered Calls: If those arcane conversion calculations and potential outcomes are giving you a headache, don’t sweat it- there’s an easier way to profit from GM.
You can sell Sept. 2012 Covered Call options on GM’s common shares, and earn nearly as much option $ now, as you’d earn in 12 months of holding the preferred shares.
There’s also the additional potential for earning an additional assigned price gain of $.86/share, if GM rises past the $26.00 strike price, which would most likely result in your GM shares being assigned/sold at expiration time. The caveat with selling covered call options is that you’re earning an option premium now, in return for agreeing to sell at the strike price up until the expiration date.
(You can discover additional details for this and over 30 other high options yields trades in our Covered Calls Table.)
Cash Secured Puts: Maybe you’re not so bullish on the market, or on Ford or GM, so you don’t want to buy them at their current prices? Fortunately, both of these stocks have lucrative put options yields, which offer cash secured put sellers the chance to get paid now to wait.
These two put options trades listed below both have put options that are below the current stock prices of Ford and GM, and thereby give you the opportunity to achieve a lower break-even cost that’s over 10% below these stocks’ current prices.
As with selling call options, selling puts offers a quick payment of the option premium, within 3 days of the option sale, so you get the use of the option premium $ right away. Your broker will secure cash in your account that’s equal to the number of puts that you sell, times 100, times the strike price, hence the name cash secured puts. (Each option contract corresponds to 100 shares of the underlying stock.)
(You can find more details on these and over 30 other high yield Cash Secured Puts trades in our Cash Secured Puts Table.)
Share Performance & Technicals: Both Ford and GM are well off their 52-week highs. Both of these stocks have been some of the best stocks to buy in 2012 for price gains, but they’re still down over the past year. They’re currently in the Relative Strength neutral zone, being neither overbought or oversold:
Author owns shares of Ford, and used to own a Mustang, back in the Stone Age.
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