2 Defensive Dividend Stocks Outperforming The S&P

By Robert Hauver

Looking to play defense in the market? As the market has vacillated between up and down months since July, income investors are seeking dividend paying stocks with less correlation-i.e., dividend stocks which are defensive during pullbacks, but still share in rallies. It has become more challenging to find such an animal, but they are out there. However, defensive stocks aren’t always the best stocks to buy for growth.  These two giant Healthcare dividend stocks, Lilly and Pfizer, have both outperformed the S&P in 2011, in both up and down markets:

LLY-pfe-perf

Performance-wise, LLY and PFE flip-flopped in the Sept. and Nov. pullbacks and the Oct. rally. Lilly just got a nice boost recently, after an analyst said that LLY’s anti-Alzheimer drug could double the share price, if proven to be effective, which he thought it had a 10-20% chance of.

Dividends:

LLY-PFE-DIVS

Financials: Lilly’ metrics outshine Pfizer’s, and also its Big Pharma peers.

LLY-PFE-ROE

Options: The put and call options trades listed in this article expire in April for LLY, and March for PFE.

Covered Calls: Although Lilly and Pfizer’s don’t have high option yields when compared to other stocks we’ve covered recently, such as CAT or CMI, both of the options trading strategies listed here give you a chance to significantly improve upon these stocks’ dividend yields over this 4-5 month period.

(You can find more details on these and more than 30 high yield covered calls in our Covered Calls Table.)

LLY-PFE-CALLS

Cash Secured Puts:  LLY’s put options offer more yield than PFE’s.  Since PFE and LLY have made 17% to 20%-plus gains year-to-date,  selling cash secured puts below the current stock prices might be the most conservative approach you could take in potentially accumulating shares. (Note: Put sellers don’t receive dividends.)

(There are more details on these and over 30 high yield options trades in our Cash Secured Puts Table.)

LLY-PFE-PUTS

EPS/Valuations: Due to issues with patent expirations, the future sales forecasts are sub-par for LLY and nearly flat for PFE. As we mentioned earlier though, there’s a trade-off between growth and defense in these stocks.

LLY-PFE-EPS

Disclosure: Author has no positions in LLY or PFE at the time of publication.

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

Author: Robert Hauver © 2011 Demar Marketing All Rights Reserved

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.

Cummins – An Industrial Dividend Stock WIth Great Earnings and High Options Yields

By Robert Hauver

Cummins, (CMI), is an Industrial dividend stock that just reported Q3 2010 earnings that blew away their Q3 2009 numbers, and also increased its credit rating during the quarter:

CMI-Earns-2010-10-27

The results were favorably impacted by $32 million due to a legal ruling in Brazil involving tax on imports from 2004 through 2008. (Adjusted net income excludes the Brazilian tax gain.)

All 4 of CMI’s market segments had strong Q3 Sales and Earnings Growth:

CMI-Sales-2010-10-27

Cummins COO said, “Many of our U.S. markets remained weak as a result of the slow recovery in the U.S. economy,”, and added, that the company doesn’t “expect to see any meaningful improvement until 2011” in the U.S., BUT, business in emerging markets “has come back much faster than we had forecast.”

CEO Tim Solso stated, “Our strength in large international markets provided significant benefits to the company, and we continue to see productivity improvements in our manufacturing operations.”

Overseas sales increased 69% in the third quarter, led by India, Latin America, South Pacific and the U.K., and now account for 63% of CMI’s consolidated revenues.  North American sales declined 3%.

In response to its third-quarter profit tripling from a year ago, CMI is raising its quarterly dividend by 50%, to $.265/share, a yield of 1.19%, AND raised its full-year financial EBIT guidance to 12.5% of sales on revenues of $13 billion.  CMI also bought back $79 million of its shares in Q3 2010, bringing total shares repurchased to $389 million under its current $500 million authorization.

Apparently, increasing revenue by 34%, tripling its profit, substantially raising the dividend, AND increasing their guidance, still wasn’t good enough for some analysts, who had pumped up expectations for CMI even further, (Hmm, do we  sense “irrational exuberance” in the wind?), and the stock got hammered, falling nearly 8%, from $94.49 to a low of $87.00 after reporting earnings.

Fortunately for contrarians and value investors, such hysteria creates opportunities. This big fall has inflated CMI’s call options and put options, which now offer double-digit yields for covered calls and cash secured puts:

CMI-Calls-Puts-2010-10-27

There are further details on these options trading strategies in our Covered Calls table and in our Cash Secured Puts table.

Company Profile:

Cummins designs, manufactures, distributes and services engines and related technologies, including fuel systems, controls, air handling, filtration, emission solutions and electrical power generation systems. Headquartered in Columbus, Indiana, Cummins serves customers in approximately 190 countries and territories through a network of more than 500 company-owned and independent distributor locations and approximately 5,200 dealer locations. Cummins reported net income of $428 million on sales of $10.8 billion in 2009. (Source: Cummins website)

If you’re looking for dividend paying stocks with strong international sales and earnings, Cummins is worth researching further.

Disclosure: Author is short puts of CMI.

Disclaimer: This article is written for informational purposes only.

3 Large Cap Dividend Stocks With Attractive Options Yields And Low PEG Ratios

By Robert Hauver

We screened for large cap dividend stocks with low PEG ratios, 3%-plus dividend yields, and attractive options yields for both covered calls and cash secured put options. We’ve added them this week to our Covered Calls table and to our Cash Secured Puts table.  These are short-term trades, (5-6 months), that should capitalize on the current low PEG ratios for next year for these 3 firms.

Conoco Philips (COP): A major integrated Oil & Gas co., (Basic Materials sector), COP’s revenues increased 42% to $95.89B for the six months ended 30 June 2010. Net income totaled $6.3B, up from $1.7B for the same period. (These figures include the sale of Syncrude).  ConocoPhillips intends to sell the remaining 60% of its entire stake in Lukoil for $3.44 billion in 2011.  (Source: Morningstar)

Eaton Corp. (ETN): An Industrial & Electrical Equipment firm, (Industrial Goods sector).  Eaton Corporation’s revenues increased 13% to $6.48B for the six months ended 30 June 2010, and net income totaled $381M vs. a loss $21M year-over-year. Revenues reflect a rise in the income from Truck segment, the Automotive segment,the international Electrical segment, and higher sales from their Hydraulics segment.  International sales have grown from 20% of the total in 2000 to 55% in 2009 (including 22% to developing markets, up from 8%).  Eaton now serves a wide swath of industrial markets, including aerospace, energy, agriculture, and construction. (Source: Morningstar)

McGraw Hill (MHP): A major Publisher, (Services sector), MHP was founded in 1888, and is a member of the S&P Dividend Aristocrats, an elite group of firms who’ve increased their dividend every year for a minimum of the past 25 years.  MHP’s revenues increased 2% to $2.66B for the six months ended 30 June 2010, and net income increased 30% to $294.4M. Revenues reflect an increase in income from Financial Services and higher income from McGraw-Hill education segment.  McGraw-Hill’s branded information services include the likes of Standard & Poor’s, J.D. Power & Associates, Platts, Aviation Week, and McGraw-Hill Education.   (Source: Morningstar)

All 3 of these dividend paying stocks have options trading strategies available.  Considering the current wave of uncertain expectations descending upon the economy and the market, income investors looking for near-term income may want to consider selling covered calls or cash secured puts, both of which offer higher yields than these firms’ dividends.

(Note: Option yields below are annualized for ease of varying time-length comparison):

COP-ETN-MHP-Options

Here are the valuation comparisons:

COP-ETN-MHPVal2

Here are key efficiency and financial ratios:

COP-ETN-MHP-Effy

Conoco Philips is currently also listed in the Energy section our

High Dividend Stocks By Sector Tables.

Disclosure: No positions at this time.

Disclaimer: This article is for informational purposes only.

Linear Tech, (LLTC) – An Undervalued Tech Dividend Stock With Growth Potential

By Robert Hauver

If you’re looking for undervalued dividend paying stocks in the Tech sector, you may want to consider Linear Technology, (LLTC), a firm which designs, manufactures and markets integrated circuits in the Specialized Semiconductor sub-sector.  A recent addition to the Tech section of our High Dividend Stocks by Sector tables, LLTC currently has a 3.26% dividend yield, paying $.23/share quarterly.  You can also increase your yield on LLTC, via options trading strategies, such as selling covered calls or selling put options.

LLTC fares well in our Industry Comparison table:

LLTC Semiconductor Industry
P/E 22.24 28.30
Price/Cash Flow/Share 18.92 22.83

ROE

45.01 10.74
ROA 18.55 8.06
ROI 49.37 9.65
Debt/Equity NO DEBT 19.30

LLTC also offers investors strong prospects for growth. In April, LLTC reported a 100% increase in net income of $.44/share, and a 55% jump in revenue.  Forbes reports that, LLTC’s “trailing 12-month earnings have already replicated its best ever four consecutive quarters”…”subsequent comparisons will necessarily moderate, but likely sustain 25 % to 30% or even higher rates of growth through 2012.” Indeed, using a baseline valuation method, even using a much lower growth rate of 15%, indicates an intrinsic value of $49.36.

Using the current consensus 2011 growth rate of 31% shows a PEG of just .74 for LLTC, which would also indicate that it’s undervalued.

More defensive, income-oriented investors may wish to hedge their bets on LLTC by selling covered calls.  However, they may miss out on a substantial upside gain.

Our Covered Call table lists the Jan. 2011 $30.00 call, which had a bid today of $2.20, an 11.5% annualized yield.  In addition, covered call sellers should receive two dividend payments of  $.23/quarter prior to the Jan. expiration, for a total payout of  $2.66/share.

The total static yield on this 8-month trade would be 9.4%, or 13.9% annualized.  The breakeven on this covered call trade is $25.52.

The potential assigned yield offers an additional $1.06/share, (3.79%), which could increase your total potential assigned yield to 13.29%, or 23.40% annualized.

Alternatively, if you wanted an even lower break-even point, you could sell cash-secured put options. Our Covered Puts table currently lists the Jan. 2011 $25 put, which was bid at $2.05 today, for an 8.2% yield in 8 months, or 12.07% annualized.

This would give you a $22.95 breakeven, which makes LLTC’s $.92/share dividend equate to a 4.1% yield. (These put-selling yields are based upon 100% cash reserve.)  LLTC closed today at $28.18.

Disclosure: No positions at this time.

Disclaimer: This article is written for informational purposes only.