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

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%!

NTI-DIV

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.”

NTI-BARRELS

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.

NTI-PUT

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.
NTI-CALL

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.
NTI-PEG
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:
NTI-ROE
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.

Dogs Of The Dow – Double Your Dividend With Options

By Robert Hauver

We checked the top 5 current Dogs of the Dow, (the current Dow component stocks with the highest dividend yields), to see how their dividends stack up vs. their covered calls and cash secured puts.  Selling covered calls can be an effective way to protect your portfolio in a down market.

The current Dow Dogs are:

DOW-DOGS-6-11-DIV-PERF

As is often the case, Telecoms have the highest dividend yields in the group, with AT&T and Verizon topping the list.  These 2 dividend paying stocks are in the Telecoms section of our High Dividend Stocks By Sector Tables.  Two Healthcare dividend stocks and Tech giant Intel round out the list.  Verizon has the most aggressive dividend payout ratio, and Intel the most conservative.  Performance-wise, only Pfizer has gained much year-to-date, while Intel and Merck have lagged the others over the past year, which, in Intel’s case, belies the strong EPS growth over the recent past:

DOWDOGS-PEG-6-11

All 5 firms posted sequential EPS gains in the most recent quarter, but Pfizer was the laggard.  Analysts don’t currently believe that Intel can improve a great deal next fiscal year, given the outstanding 160% EPS growth it had this past fiscal year, which gives INTC a high 12-month PEG.  AT&T has the lowest 12-month PEG, 1.25, and the two healthcare stocks look very over-valued, when taken on a PEG basis. Looking out further, only Intel has a 5-year PEG under 1. Intel’s 10.12 P/E is also way below the average 16.41 P/E for the semi-conductor industry.

Financial Ratios:

DOWDOGS-ROE-6-11

AT&T and Intel are the clear winners in Mgt. efficiency ratios and margin, while Intel is nearly debt-free.

So, how do the dividends for these stocks compare to their January 2012 options? These call options range up to 3 times the dividend amounts.  Selling a covered call from any of the trades listed below allows you to at least double your dividend, giving you a 10%-plus static yield, and the potential for additional assigned yield gains. You’ll also get some additional downside protection, via a lower break-even point, by selling covered calls.  The catch is that you’ll have limited participation in upside price gains, should any of these dogs start to run. You can find more info on these and other covered call trades in our Covered Call Table.

Covered Calls:

DowDogs-6-11-CALLS

Feeling not so bullish? Selling cash secured put options can give you an even lower break-even point than the calls listed above. The put premiums below range up to 6 times the dividend amounts for this period.  Your net cash outlay will be the cash reserve minus the put premium you receive. Ex.) For AT&T, you’d have a net outlay of $2,778.00, ($3000.00 less $222.00 received for selling one put. Each options contract corresponds to 100 shares of the underlying stock).  You can find more info on these and other covered call trades in our Cash Secured Puts Table.

Cash Secured Puts:

DOwDogs-6-11-PUTS

Disclosure: Author is long AT&T and Intel.

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

Top Dow Dividend Stocks – Dividends vs. Options

By Robert Hauver

The Dogs Of The Dow strategy focuses on the Dow dividend paying stocks with the highest dividend yields. Currently, the 3 highest dividend paying stocks in the Dow are AT&T, (T), Verizon, (VZ), and Merck, (MRK).  This week we’ll compare current covered calls and cash secured put options to the dividend payouts for these stocks, all of whom are listed in our High Dividend Stocks By Sector tables.

Here’s how these 3 stocks have performed:

T-VZ-MRK-Perf

Like most other Healthcare stocks, Merck has lagged the market over the last year.  In 2011 it has also lagged the Healthcare sector, which is up nearly 10%.  AT&T and Verizon have both surged over the past year, partially due to the smartphone revolution.  AT&T benefited greatly from its exclusive sales arrangement with Apple, (AAPL), for selling the IPhone, an exclusivity which was lost, when Apple also granted Verizon selling rights in 2011.

Selected Financial Metrics:

T-VZ-MRK-ROE

AT&T is the clear winner in terms of ROE. The 2 Telecoms also have much higher operating margins than MRK.

Valuations:

T-VZ-MRK-VALUE

Again, AT&T has outperformed these other 2 firms, in past EPS and present EPS growth, in addition to having the lowest Price/Book, and PEG ratio, which, at 1.63, isn’t that attractive. However, its PEG for next year, at 1.31, is closer to being undervalued.  Although all 3 stocks are currently far below their values on a Discounted Future Earnings basis, Merck is sporting a very high PEG ratio for the next year, thanks to its stratospheric current P/E.

Covered Calls vs. Dividends:

T-VZ-MRK-CALLS

Selling 6-month covered call options is one way you can increase your income on these stocks. Note how the call premiums are all higher than the dividends paid out during this term.  You’ll find more details on these and other covered calls  in our Covered Calls Table.

Cash Secured Puts:

T-VZ-MRK-PUTS

These cash secured puts will give you an entry point/break-even even further below those of the covered calls.   Our Cash Secured Puts Table has more details on these and other put options trades.

Disclosure: Author is long shares of AT&T, and short puts of AAPL.

Disclaimer: This article is written for informational purposes only and is not intended as investing advice.