Double Dividend Stocks | Apr 29, 2012 12:11AM ET
Since the US auto industry had its best sales quarter in 4 years in Jan-March, and overall world sales are also expected to increase in 2012, you’d think that auto parts companies would be fairly valued already. But, that’s not the case, even with standout growth apparent in some firms. We found 2 solid dividend paying stocks within this sub-industry that are undervalued on many metrics: Magna International, (MGA), a Canadian firm, and Standard Motor Products, (SMP), a US firm. Magna sells its parts to Original Equipment Manufacturers, and Standard sells its parts in both the aftermarket segment and also to Original Equipment Manufacturers. (More detailed profiles are at the end of this article.)
Both of these dividend stocks had strong growth in their most recent quarter, and have good growth forecasts for their next fiscal year. However, their P/E’s are way below industry avgs., making them look undervalued on a PEG ratio basis. MGA’s current 10.72 P/E is approx. in the middle of its historic P/E range of 7.93 – 14.03, while SMP’s 5.44 P/E is actually below its historic range of 7.24 – 27.97. Both stocks are also cheap on a Price/Book and Price/Sales basis:
SMP has higher put options yields in the 2 trades listed below. SMP’s August $15.00 put currently pays just over 10%, on a 4-month term, for a very high annualized yield of over 33%.
You’re basically getting paid to wait, with the possiblity of having SMP put/sold to you at the $15.00 strike price, if SMP goes below $15.00 at or near expiration. However, your break-even cost would be $13.45, due to the $1.55 put premium you received when you made the put sale. As with the calls, these put options pay a lot more than the dividends do over the next 4-5 months. (Note: Put sellers don’t receive any dividends.)
Unlike selling covered calls, when selling cash secured put options, you don’t buy the underlying stock first. Instead, your broker will “secure”, i.e. hold, an amount equal to 100 times the strike price of the put option you sell. In the SMP example below, you’d sell 1 $15.00 put option.
Since each option corresponds to 100 shares of the underlying stock, your broker would hold $1500.00 for every $15.00 put option that you sell. At expiration time in August, you’ll either end up with 100 shares of SMP being sold to you, or the $15.00 put will expire worthless.
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