With today’s dour market mood and the lack of decent yields- what’s an investor to do for attractive total return? I think it’s worth ferreting out high quality, good-yielding stocks and then writing covered calls and naked puts to obtain a wide range of results that can provide exactly that.
One issue that meets my criteria right now is:
Automatic Data Processing [NYSE:ADP] Feb. 18, 2009 close: $36.84
52-week-range: $30.83 (Oct. 16, 2008) - $45.97 (Sep. 9, 2008)
Dividend = $0.33 quarterly = 3.58% current yield
ADP is America’s largest payroll and employee tax filing processor with over 585,000 accounts. Domestic revenues account for about 82% of their approximately $9 billion in expected sales for FY 2009 (ends June 30, 2009). They also provide Human Resource solutions and various accounting, inventory and leasing services to smaller companies.
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Johnson & Johnson [NYSE:JNJ] Feb. 16, 2009 - $57.10
52-week range: $52.05 (Oct. 10, 2008) - $72.76 (Sep. 9, 2008)
Dividend = $0.46 quarterly = 3.22% current yield.
In a treacherous market, perhaps it’s time for an interesting play on a boring company. I’m going to show you why I like JNJ at today’s price and how I’m playing this for excellent total returns even if the shares don’t do a whole lot over the next year or so.
After years of steadily increasing sales, cash flow, earnings and dividends 2009 may be the first year of declining EPS for JNJ in a very long time. 2008 finished with earnings of $4.56 /share up 9.88% from 2007’s EPS.
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In crazy markets like today’s many investors have retreated to the safety of CDs, or treasury bills and notes to get a little yield while waiting out the economic perfect storm. With rates this low, however, those guaranteed returns are likely to insure that you will lose buying power after inflation and taxes.
Here’s a conservative play that could provide substantial total returns without (in my view) undue risk.
Procter & Gamble [NYSE:PG] Feb. 13, 2009 close: $51.09
52-week range: $49.95 (Feb. 12, 2009) - $73.57 (Sep. 15, 2008)
Dividend = $0.40 quarterly = 3.13% current yield
Procter & Gamble is a world leader in products that would seem relatively immune from demand destruction in all but the worst economic conditions. They make detergents, soaps, toiletries, foods, paper products and industrial goods.
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Diamond Offshore [NYSE:DO] Feb. 10, 2009 close: $65.56
52-week range: $54.52 (Jan. 15, 2009) - $146.20 (May 21, 2008)
Dividend: Regular $0.125 quarterly
Special (Extra) Dividends have been paid in 2006, 2007 and 2008.
Q1 2009 Dividend = $2.00 (Reg. + $1.875 extra)
Diamond Offshore is a major worldwide driller of offshore oil and gas wells. Non-US revenues are approximately 50%. Anadarko and Petrobras accounted for about 9.4% and 9.2% of 2008 revenues respectively.
Earnings surged with rising oil prices from 2005 through 2008. Most of DO’s fleet is contracted through 2009 at high day rates so the recent drop in crude pricing will not be reflected in DO’s earnings this year.
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Nike ‘B’: [NYSE:NKE] Feb 6, 2009 Close: $48.68
52-week range: $42.68 (Nov. 20, 2008) - $70.60 (Mar. 24, 2008)
Dividend = $0.25 quarterly = 2.05% current yield
Nike is a world leader in athletic footwear, apparel and accessories. They operate in over 180 countries with expected FY 2009 revenues of $19.7 billion. Officers and directors control 95.5% of the class ‘A’ shares and 19.7% of the class ‘B’ shares (assuming full conversion of class ‘A’ into class ‘B’ on a one-to-one basis).
Nike seems well on its way to its eleventh straight year of increased EPS. Earnings per share from FY 2008 (ended May 31, 2008) came in at an all-time high of $3.44 and EPS for the first half of FY 2009 were $1.83 versus $1.63 for the period ended November 30th.
Consensus views are that NKE can hit $3.77 and $4.15 for the FYs ending in May 2009 and 2010 respectively. Thus Nike shares now trade at just 13.05x trailing earnings and 12.5x calendar year 2009 expected EPS of $3.90. Excepting last fall’s panic period, these shares have not traded at this low a valuation since 1995.
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Dell, Inc. [NDQ:DELL]
Feb. 6, 2009 close: $9.46
52-week range: $8.72 (Nov. 21, 2008) - $26.04 (Aug. 8, 2008)
Dell is a world leader in computer systems and services with FY 2008 revenues of over $62 billion. Despite the poor economy, last fiscal year’s
earnings (FY ended Jan. 31, 2009) are expected to have been their second highest ever at $1.35/share. That’s up 3.05% from FY 2007.
Assuming the world stays in recession, the current consensus estimate for the year just begun is now $1.22 /share – not too bad considering the punk environment. With Dell’s shares now at $9.46, the forward P/E is just 7.75x – well under any previous multiple for these shares over the past 20 years.
Dell’s balance sheet is solid. They held over $8.57 billion in cash against total debt of just $2.117 billion as of October 31, 2008. Only $266 million in principal comes due in the next five years and the long-term debt was issued at very favorable rates averaging just 5.4%. There is no defined benefit plan and no preferred stock. Value Line gives DELL an ‘A’ rating for financial strength.
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American Eagle Outfitters [NYSE:AEO] Feb. 3, 2009 $8.52/share
52-week range: $6.98 (Nov. 21, 2008) - $23.84 (Feb. 4, 2008)
Dividend = $0.10 quarterly = 4.69% current yield
American Eagle serves the casual apparel market targeting the 15 – 25 year old market segment. They have about 958 mall-based AE stores in the US and Canada plus 116 stand-alone stores.
Like everyone else in retailing their business is very poor right now. After hitting new all-time high EPS in FYs 2004 – 2007 (FYs end January of the following year) FY 2008 will be down about 45% in the year just ended. Including an expected Q4 drop from $0.66 to just $0.20 full year EPS were likely $1.00 versus $1.82. The current year should be even worse with EPS estimates now running $0.75 for FY 2009.
Why be interested in this stock then? The problems are the result of the recession and not AEO’s execution. When the economy picks up, so will American Eagle’s results. The company has just $75 million in total debt and held over $343 million in treasury cash as of Nov. 1, 2008. With just 206 million shares outstanding that’s $1.32 /share in cash (net of debt). Tangible book value is over $6.50 /share.
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