Thursday, August 3, 2017

Four Dividend Value Stocks in an up market

I have four nice dividend stocks I want to buy again.   I lost each one of these stocks to a call buyer during the past 6 months.   Although the Dow Jones Industrial average is hitting highs every day, these four stocks are not participating.   They are getting close to or already have dropped below the strike price at which they were taken.

  •  Stocks on call that were assigned and whose stock price retreated to break the previous strike price are ripe for reinvestment.
  • When picking a dividend stock, breaking some of my Dividend Machine rules can help an income portfolio.
  • Although the over all market is at all times highs, you can find bargains in these Dividend growth stocks.

Not one of the four stocks I am writing about today is a true Dividend Machine.   To be a dividend machine, they need a yield of about 2.75%, earnings per share (EPS) greater than the dividend paid out, a history of dividend growth near 4% and a D/E ratio of less than 1 or within industry standard.   While using a disciplined strategy takes a lot of anxiety out of investing for income, I do vary from these rules on occasion.  In my explanatory notes, I tell you why I am adding each stock to my short term watch list.

Microsoft (MSFT)

I am long Microsoft but I lost some of my position in July.  I sold calls with a $70 strike price and MSFT was called away in July.   MSFT has not sunk below the strike price of $70, today it is trading in the $72.00 range but yesterday MSFT intraday prices were as low as $71.45.   It is getting close to breaking through the previous strike price.

I am motivated to keep my MSFT and to add to it because I think MSFT has figured out their business.  They are not just a PC company.  Cloud revenue has grown.  However, Microsoft is no longer a Dividend Machine.  With a yield of about  2.3% MSFT's dividend yield is well below my target of 2.75%.  Earnings are greater than dividends paid out.  Their most recent dividend increase was 8.3% and this is one of the metrics that makes me want to own MSFT for my income portfolio.  D/E (debt to equity) ratio is a bit sticky.  MSFT has a D/E of 1.191.   This metric is why I am not willing to chase MSFT and buy high.


Microsoft's revenue from 2012 to 2017 financial years, by segment (in billion U.S. dollars)

Created with Highcharts 3.0.10Revenue in billions of U.S. dollars0026.9826.4326.4930.440021.7423.7225.0427.440038.4643.1640.4338.77-0.490.4-0.340.27-6.64-6.7137.1339.69000019.519.0200006.746.4600004.645.6600006.26.620000000000Productivity and business processesIntelligent cloudMore personal computingCorporate and OtherCommercial LicensingDevice and Consumer LicensingComputing and Gaming HardwareCommercial OtherDevices and Consumer OtherPhone Hardware

When to buy MSFT.   I have Microsoft on my watch list and my target is $69.00.   I use call option premiums to guide my target price on this stock.   Over the past few days, October options are interesting.   A $75 strike price fetches about $1.00.   I like at least a 1% yield from the call premium to make up for the low dividend yield.  If you go up to a $77.50 strike price or above, you will not get that 1% yield on premium.   I also like a minimal 8% gain on my basis should my shares get called away (also known as assigned.)  That makes my target $75 minus 8% or $69.

If I buy at $69 I and sell calls on the position, it is highly likely I will receive at least a 1% call premium.  If I  buy before the August  15 ex-dividend date, I will get the $.39 quarterly dividend.  Should my shares be called away again, and I think it is highly likely they would be called away, I would get my 8% gain in under 80 days.

Eli Lilly (LLY)

Lilly is another stock that I buy, sell calls, have it called away and buy again.   Most recently my LLY was called away on a weekly call on July 28 at $82.50.  I was quite surprise because the call buyer paid me $1.40 for that call and when it was called away LLY closed at $83.10 which means the call buyer was up only  $.80.

Today LLY is trading at $82.10.  This is below my strike price but at this basis I cannot get 1% on a call premium.   Therefore, using the same math as I did on MSFT, I see an $85 October call fetches about $.95 and that meets my 1% call premium yield.  To get my 8% gain, I would need to buy at $85 - 8% or about $78.

Again on LLY there are negatives.  First the yield on my target is o.k. at 2.67% not quite 2.75% but pretty good is I can sell calls on my shares.  Dividend growth is weak at 1.96%.  Earnings per share showed a big loss the first quarter of 2017.  However, the most recent quarter showed significant improvement.   My history of buying LLY and selling calls and the fact that this stock has been a solid company for a very long time puts LLY on my watch list.


Earnings History and Estimates for Eli Lilly and (NYSE:LLY)

 Conoco Phillips (COP)

Conoco Phillips is a troubled stock in a troubled industry.   It has the worst fundamentals when doing Dividend Machine analysis.  Earnings per share have tumbled due to low oil prices to the point where COP reduced the dividend in 2015.  The reason I am including COP in this watch list is their most recent performance.  Earnings have improved and so have dividends.  Their most recent dividend increase was 6%.   D/E ratio is quite acceptable at .7477 source ycharts.

I hold some COP and have suffered but I am a patient investor.  Sometimes I dump a stock right away and other times I find it too late to sell.   I sold calls on COP to make up for the dividend reduction.  I had calls with a strike price of $50 and $49 and all those calls were assigned.   Now COP is down to $45.40.  This is a 15% retracement from the high of $53.   52 week low on COP is $39.

COP does not have an October call.  You would have to go out to November and that is too far for me.   Therefore, I am going to keep COP on my watch list and monitor the calls.  I would like to buy later in August so the November call expiration is less than 90 days out.  Right now a November $49 gets a $1.10 in call premium plus the October dividend of $.265.   My target is $45.

Source:  Zacks

Earnings: Earnings per share excluding special items came in at 14 cents against the Zacks Consensus Estimate of 2 cents loss per share.
Revenue: Revenues of $8,882 million surpassed the Zacks Consensus Estimate of $6,735 million.
Key Stats: Total production during the second-quarter 2017 came at 1,437 thousand barrels of oil equivalent per day (MBOE/D), down from 1,546 MBOE/D in the year ago quarter period.The total realized price of hydrocarbon was $36.08 per barrel of oil equivalent (BOE), against $27.79 per BOE in the April to June quarter of 2016, implying higher average realized prices across all commodities.    

Gentex (GNTX)

My last stock on this watch list is not well known.  They make rear view mirrors and other window products.  Unfortunately we have to look forward but it is an interesting small cap stock.  I sold a $17.50 call that was exercised (assigned, called away) and now GNTX is trading at $16.90.  


Gentex misses on only one Dividend Machine metric and that is yield.  At $16.90 their dividend yield is 2.13%.  Dividend growth is 11.11%, earnings exceed dividends with dividends paid out only 31.4 % of earnings.  They have virtually no debt with a D/E ratio of .0184.

Take a look at  GNTX's most recent Earnings and Revenue Growth:  Source

 Fiscal Quarter2017
(Fiscal Year)
(Fiscal Year)
(Fiscal Year)

   EPS0.33 (3/31/2017)0.28 (3/31/2016)0.26 (3/31/2015)
   EPS0.29 (6/30/2016)0.25 (6/30/2015)
   EPS0.32 (9/30/2016)0.26 (9/30/2015)
December  (FYE)
   EPS0.3 (12/31/2016)0.31 (12/31/2015)
   Previous 3 Years

Calls are not robust but I have written (sold) calls several times on this little gem.   A September $17.50 fetches $.35.   Thirty five cents doesn't seem like much but it is a 2% premium.   The $17.50 strike is only a 3.5% gain so I have to wait for a proper call to jump in again.  At this moment I see no calls in October and none of the November calls are trading.   I will try to get in at $16.  When the $17.50 call trades, that would get me the 8% minimal gain I need should my shares be called away.


The final Table below compares these four very different stocks.  All are dividend stocks, all have decent recent fundamentals.  All provide the opportunity to find a little value in this very robust stock market.

I do not chase stocks.  I use the fundamentals that have worked for me for many years.   Consider this strategy for the stocks in your portfolio.   Buy, cash the dividend, sell calls, cash the premium, if called away and a new opportunity to buy emerges and the fundamentals are tolerable, get in again and repeat.

M* MoneyMadam