2 Sexy Undervalued Consumer Goods Dividend Stocks With High Options Yields

By Robert Hauver

If you’re looking for the crossroads between dividend paying stocks and undervalued earnings growth, one corner of the market to check out is the Consumer Goods sector, more specifically, the Apparel Stores sub-industry.  Although you won’t find high dividend stocks in this group, you will find some dividend stocks with good sales and EPS growth in 2011, and further into the future, that should benefit from the continuing recovery. This week we screened this sub-industry for dividend paying stocks with low PEG values, strong ROE and Profit Margin, plus high options yields.

We came up with 2 firms: Limited Brands (LTD), who owns Victoria’s Secret,Bath & Body Works, and many other brands;  and Guess (GES), the owner of the Guess?, and Guess Jeans brands, and others as well. (More info at the bottom of this article).

Here’s how they stack up vs. their peer group for dividend yield, mgt. metrics and profitability:

GES-ROE-2011-01-27

LTD is much more highly leveraged than industry averages, but also has a much higher Return On Equity, (ROE).  Both firms have an above-average dividend yield, but GES has higher profit margins, ROA, and ROI.

LTD  raised its fiscal 2010 earnings forecast to between $1.82 and $1.97 per share, up from $1.68 and $1.83, with projected fourth-quarter 2010 earnings between $1.02 and $1.17. Sales at stores open at least one year rose 10% in the third quarter from a year ago.

LTD has an active dividend and share repurchase program- they paid a special dividend of $3/share in December, and they also also authorized a share repurchase program of $200 million.

Both stocks have PEG’s below 1 for this year and the next 5 years, although LTD has the edge in all 3 PEG figures:

GES-PEG-2011-01-27

In terms of technical indicators, both stocks are also currently looking oversold on MACD and Stochastic charts.

Options Yields:

You can earn 7 to 10 times more than the dividend yields on these 2 stocks, by selling Covered Calls:

GES-CALLS-2011-01-27

In addition, the above covered Covered Call option trades still give you the potential for some additional price gains, and a lower breakeven price.

(There’s more info about these and other Covered Calls trades in our Covered Calls Tables.)

Selling Cash Secured Puts also offers a lower breakeven price and double-digit options yields:

GES-PUTS-2011-01-27

(There’s more info about these and other Cash Secured Put options trades in our Cash Secured Puts Tables.)

Company Profiles:

Limited Brands (LTD): Limited Brands, through Victoria’s Secret, Pink, Bath & Body Works, La Senza, C.O. Bigelow, White Barn Candle Co. and Henri Bendel, is an international company that sells lingerie, personal care and beauty products, apparel and accessories.  The company operates more than 2,600 specialty stores in the United States, and its brands are sold in more than 700 company-owned and franchised additional locations world-wide. Additionally, the company’s products are available through the Victoria’s Secret Catalogue and online.  Limited Brands recorded sales of $8.6 billion in 2009. (Source: Limited Brands website)

Guess (GES):  The Marciano brothers founded Guess in 1981 as a denim jean design firm. Guess is now a global enterprise, headquartered in Los Angeles, with nearly 13,000 employees. The company designs, markets, licenses, and distributes fashion-forward apparel and accessories through company-owned stores, licensed stores, and wholesale distribution (such as department stores). Brands include Guess?, Guess Jeans, G by Guess, and Guess by Marciano. (Source: Morningstar)

Disclosure: No positions

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

An Undervalued Chinese Dividend Stock With High Options Yields

By Robert Hauver

In spite of this week’s 2% pullback, the S&P is up almost 15% since Sept. 1st, so we went looking for foreign dividend paying stocks that haven’t advanced as much as the general market, but still have strong metrics, low debt, and good growth prospects for next year. We came up with China Mobile, (CHL), a dividend stock which is also the biggest mobile firm in the world.

With over 522.283 million customers, China Mobile, (CHL), has the world’s largest mobile customer base, and dominates the Chinese mobile market, with a market share of approximately 70.6% in Mainland China. The Group’s GSM global roaming services covered 237 countries and regions and its GPRS roaming services covered 182 countries and regions.

The Company’s majority shareholder is China Mobile (Hong Kong) Group Limited, which, as of 31 December 2009, indirectly held an equity interest of approximately 74.22% in the Company through a wholly-owned subsidiary, China Mobile Hong Kong (BVI) Limited. The remaining equity interest of approximately 25.78% of the Company was held by public investors.

With a 3.5%-plus dividend yield, CHL just made it into the Telecom stocks section of our High Dividend Stocks by Sector Tables.  However, it also has some high options yields, which we’ve listed later in the article.  Here’s how CHL compares to its Wireless Industry Peer Group:

CHL-ROE-2010-11-12

CHL also has a low dividend payout ratio of 43.02%.

Although analysts’ 5-year EPS growth projections aren’t very high, CHL does have a low next year PEG ratio, which supports short-term options trading strategies, such as selling Covered Calls and Cash Secured Puts.

CHL-PEG-2010-11-12

The following 2 option trades expire in June 2011:

CHL-CALL-2010-11-12

You can find more details on the above call option trade in our Covered Calls Table.

Selling June cash secured put options would also net you a double-digit annualized yield:

CHL-PUTS-2010-11-12

We’ve added the above put trade this week to our Cash Secured Puts Table, which lists additional details.

CHL Market Analysis:

With revenue and a subscriber base more than twice the size of it closest competitor, China Mobile can afford more spending on technology and products and can launch new services at a lower cost per customer, thereby fetching higher margins than its rivals. A strong brand helps the carrier attract and retain not only high-spending business subscribers, the most profitable segment, but also the best mobile application developers and business partners, which reinforces China Mobile’s competitive edge in service offering and user experience.

The growth prospects for China Mobile remain attractive, as the carrier benefits from rising mobile penetration in China. The current penetration rate of around 50% is significantly below that of emerging markets such as Mexico and Brazil (at over 70%), and this gap should narrow in the coming years, with rising disposable income levels in China. While the urban markets may have become saturated, most of the future growth will come from the vast rural areas, where income levels of 800 million residents are lower than in the cities, but are growing steadily. These rural markets are a sweet spot for China Mobile, which, with its lower cost base, can afford to roll out basic voice plans and entry-level handsets to attract price-sensitive rural residents, and still make decent profits. Its rivals, China Unicom, (CHU) and China Telecom, (CHA) , probably can’t afford to compete aggressively in this market.

However, China Mobile faces a tough fight in the 3G market, where its competitors enjoy considerable advantages based on technology.
(CHL is mandated by the Chinese government to provide 3G services based on a nascent home-grown technology standard called TD-SCDMA(TD), while its rivals can deploy commercially mature 3G technology with a well-established vendor network.)  In the long term, this could erode CHL’s competitive advantage. (Source: Morningstar)

Disclosure: No positions at this time

Disclaimer: This article is written for informational purposes only.