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Income Option Trade for a 12% Return

In our Monthly Income Report, we look for opportunities to utilize option selling to generate consistent income. While we focus on selling cash-secured puts and covered calls on high quality stocks, we sometimes identify high return trades for increased income. These are stocks with positive confirmation and continuing chart trend based on technical analysis. This month we have identified a stock with a bullish technical indicator that has potential to generate a 12% return in only 40 days.

The option trade for monthly income:

Stock: CF Industries Holdings, Inc. (CF) manufactures and distributes nitrogen fertilizer, and other nitrogen products. The Company’s nitrogen fertilizer products are ammonia, granular urea, urea ammonium nitrate solution (UAN) and ammonium nitrate (AN). Its other nitrogen products include diesel exhaust fluid (DEF), urea liquor, nitric acid and aqua ammonia, which are sold primarily to the Company’s industrial customers, and compound fertilizer products (nitrogen, phosphorus and potassium or NPKs). The Company’s segments include ammonia, granular urea, UAN, AN and other.

The stock has pulled back from its February levels due to industry pricing pressures. Revenues are likely to rise 13% in 2017 and 6.9% in 2018, after falling 15% in 2016. We see steady North American fertilizer demand growth in 2017, but some pressure on prices. However, new production is likely to lead to increased volumes for CF in 2017. We think market conditions will start to improve with this earnings release as capacity additions slow and Chinese capacity reductions continue.

This stock has formed a diamond bottom pattern (Bullish), providing a target stock price for the short-term above $30 per share. We think the stock can hit the target price within 6 weeks or less. The price recently displayed stronger RSI and positive PMO movements signaling a new uptrend has been established. The Short-Term KST indicator has triggered a bullish signal by rising above its moving average.

Recent bullish option flow has been detected in CF Industries with 5,006 calls trading, 3x expected, and implied volatility increasing almost 4 points to 41.09%. Aug-17 32.5 calls and Aug-17 30 calls are the most active options, with total volume in those strikes near 2,500 contracts. The Put/Call Ratio is 0.22. Earnings are expected on August 2nd.

Sell PUT Option for Monthly Income

 

 

 

 

 

 

 

Strategy: CF is currently trading at $27.89 per share. We want to sell a cash-secured put option on CF using the August 2017 30 Call. For each 100 shares of CF you want to control, sell one August 30 PUT option for a $3.00 credit or better. That’s potentially a 12.0% assigned return in 40 days.

Exit Trade: Be prepared to exit the PUT (buy to close) when the stock price moves above $30 to lock in profits. If not, there is a chance the stock may be put to investors. If this happens, then investors can sell covered calls for monthly income until the stock is called away.

This is a higher risk trade than we normally place in the Monthly Income Report. However, this is a nice setup with a high volatility play, positive chart technical confirmation and increased premium from selling options for monthly income.

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A High Yield Play on Lower Corn Yields

The U.S. cut its corn-harvest estimate 12 percent and said inventories next year will be smaller than fore cast in June as the worst Midwest drought since 1988 erodes prospects for a record crop.  With the increase in corn prices, companies using corn will be hit with higher expenses while those increasing corn yields will prosper.  The rise in corn prices will affect food prices as corn is a primary food source for livestock.  Investors must be wary of how the increase in corn prices may affect their portfolios.

Crop conditions as of July were the worst for that date since the drought of 1988, government data show.  Tighter supplies than expected may boost costs for ethanol makers including Archer Daniels Midland Co. (ADM) and several meat producers.  Investors are lightening up on their protein diets, unloading shares of Sanderson Farms Inc. (SAFM), Pilgrim’s Pride Corp. (PPC) and Tyson Foods Inc. (TSN) over the past month amid a swift rise in futures prices for feed grains.

Fertilizer stocks are moving higher after the government reported greater than expected damage to corn crops.  Shares of fertilizer makers CF Industries (CF), Potash (POT) and Mosaic (MOS) have already made a significant move up in price.  In addition, one fertilizer stock to watch was an IPO in November 2011 that pays a high dividend yield.

Rentech Nitrogen (RNF) was formed by Rentech, Inc. to own, operate and expand its nitrogen fertilizer business.  Rentech Nitrogen’s assets consist of a nitrogen fertilizer facility located in East Dubuque, Illinois, owned by Rentech Nitrogen, LLC, the operating subsidiary of Rentech Nitrogen Partners, L.P.  The facility is located in the Mid Corn Belt in the northwestern corner of Illinois, adjacent to the Iowa and Wisconsin state lines, and produces primarily anhydrous ammonia and urea ammonium nitrate solution, using natural gas as its primary feedstock, for sale to customers in the Mid Corn Belt.

Rentech Nitrogen Partners, L.P. (RNF) announced today the declaration of a cash distribution of $1.17 per common unit for the second quarter of 2012. The distribution is payable on August 14, 2012 to holders of record as of August 7, 2012.  RNF is trading at $30.56 at the time of this writing.

This will be the second cash distribution paid by Rentech Nitrogen since its initial public offering (IPO) in November 2011, and will result in cumulative cash distributions since the IPO of $2.23 per common unit.  Of that amount, $1.70 relates to the twelve months ending December 31, 2012, and $0.53 relates to the period from the IPO through December 31, 2011.

Rentech Nitrogen believes that it is well positioned to exceed its forecast of cash available for distribution in the range of $2.86 per common unit for the twelve months ending December 31, 2012.  RNF is trading at $30.56 at the time of this writing.  Based on $2.86 in dividends, RNF has a dividend yield of 9.36%.  Based on the current year EPS, RNF trades at a PE of 10.8.  RNF has a Forward EPS Long Term Growth (3-5 Yrs) of 12%.

The Partnership will provide details on its guidance during its previously announced conference call to discuss financial results for its 2012 second quarter on August 3, 2012.

Revenues for the three months ended March 31, 2012 were $38.5 million, as compared to$23.9 million for the comparable period in the prior year. Current period revenues benefited from higher sales prices caused by a combination of low levels of grain and fertilizer inventories and expectations of higher corn acreage in 2012.  An early spring application window, strong nitrogen demand, strong plant production and on-stream time, and low natural gas prices contributed to the exceptional results for RNF.  During the quarter, RNF operated the plant at maximum capacity to take advantage of the strong market dynamics.

RNF continues to benefit from relatively low North American natural gas prices, which, when coupled with strong nitrogen product prices, resulted in gross profit margin of 59% for the period, up from 43% for the comparable period in the prior year.

The New Dividend Growth Superstar Series

It is easy to just run a stock screen looking for good dividend stocks and find a few worth evaluating for addition to your portfolio.  Many investors have had success by buying dividend stocks and compounding their returns over time.  This will generally bring you back to the classic blue chip stocks.  These stocks are consistent and steady performers.  However, did you ever wonder what these stocks produced when they were younger such as 25 years ago?  Yeah, these types of stocks made many millionaires.

So if you want to follow a similar path, where would you start today?  I have an idea to identify stocks that have performed well in the past 5 years.  I am looking at 5-year growth rates in revenue, EPS, cash flow and book value.  The real superstar stocks will dominate these metrics and have cash to share with owners.  To make my list, each stock must have at least a 10% 5-year growth rate in each metric and payout a rising dividend during this period.  It is these stocks that I call “The New Dividend Superstars.”  These are stocks that you may not think of as dividend stocks. But in a few years your yield on cost will be much higher than you realize.  Lastly, you will avoid the dividend bubble in current high yield stocks.  It will take several posts to discuss stocks on this list.  So let’s get started.

CF Industries Holdings, Inc. (CF) through its subsidiary, CF Industries, Inc., manufactures and distributes nitrogen and phosphate fertilizer products, serving agricultural and industrial customers worldwide.  CF has been on a ride with a 31% price increase year to date.  CF has a very low yield of 0.84% but it has a 5-year dividend growth rate of 83%.  As for the metrics, CF has a 5-year EPS growth rate of 105% with a 5-year cash flow growth of 72%.  Revenue growth over 5 years was 25% and book value 37%.  Fertilizer stocks are moving higher after the government reported greater than expected damage to corn crops.  This should help to sustain the growth of CF in the coming quarters.

AZZ Incorporated (AZZ) is a manufacturer of electrical products and a provider of galvanizing services.  AZZ is up 43% year to date following great Q1 earnings.  The company posted Q1 earnings of $1.26 per share, compared with the prior year period’s $0.75. Excluding non operational income and expense items, earnings per share was $1.02. The Capital IQ consensus estimate was $0.81 EPS.  Revenues were $127.1 million, compared with $114.33 in the same quarter last year. Analysts were looking for $122.82 million in revenues.  AZZ declared a 2 for 1 stock split of the Company’s Common Stock in the form of a 100% stock dividend, payable on July 30, 2012 to shareholders of record as of July 16, 2012.

AZZ is a small stock with a market cap of only $821 million.  AZZ has a 5-year EPS growth rate of 12% with a 5-year cash flow growth of 18%.  Revenue growth over 5 years was 12.5% and book value 19%.  AZZ has a dividend yield of 1.57% that has a 5-year dividend growth rate of 67%.  AZZ has a payout ratio of 26%.

Herbalife (HLF) is a global nutrition company that sells weight-management, nutrition, and personal care products intended to support a healthy lifestyle.  HLF got hammered in May on speculation that David Einhorn of Greenlight Capital would short the stock.  This never happened when Greenlight released their new positions.  This creates a great opportunity to buy this growth stock $20 cheaper with a higher dividend yield.  HLF reported first quarter net sales of $964.2 million, a 21 percent increase driven by a 24 percent increase in volume points compared to the prior year period. For the same period, the company reported net income of $108.2 million, or $0.88 per diluted share, reflecting an increase of 22 percent and 24 percent respectively compared to the adjusted first quarter 2011 net income of $88.7 million and $0.71 per diluted share.

HLF recently received seven new retail licenses to expand sales in China.  HLF plans to buy back nearly $428 million of its own shares after seeing its stock drop to complete a $1 million buyback plan.  HLF is a mid cap stock with a market cap of $5.58 billion.  HLF has a 5-year EPS growth rate of 28% with a 5-year cash flow growth of 22.8%.  Revenue growth over 5 years was 13% and book value 14%.  HLF has a dividend yield of 2.43% that has a 5-year dividend growth rate of 64%.  HLF has a payout ratio of 25%.

Fastest Dividend Growers with a Bullish Outlook

Buying stocks that increase dividends allows you to take advantage of one of the most powerful tools in the investors’ arsenal — the wealth-building effect of compounding.  And consistent dividend growth is like jet fuel for the compounding engine.   But there are more advantages to companies able to consistently grow dividend payments.  One often overlooked “plus” is that they tend to be safer investments.  Dividends are a litmus test of a company’s true financial strength.  Only companies able to grow earnings through good times and bad will commit to consistently raising dividends.  And these are the types of business that tend to see more stability in their shares.

It’s even better when you have companies that are increasing their dividends at high rates over a five year or longer period.  My search for 5-year dividend growth rates creates a list of potential fast dividend growers.  But to make the list more appealing, I also require an equity summary score that indicates the consensus among analysts is Bullish or Very Bullish.  Investors should keep in mind that dividend growers may not have a high yield today but will grow your yield on cost for years to come.  This is a list of the best stocks with highest dividend growth rates:

UnitedHealth Group (UNH) is a diversified health and well-being company dedicated to helping people live healthier lives and making health care work better.  While the clouds overhead are the ruling on Obama’s Health care law, UNH has not missed a beat with its dividend growth.  UNH has a dividend yield of 1.18% on a 13% payout ratio.  More impressively, UNH has a 5-year average dividend growth rate of 85%.  UNH increased its dividend 30% in the past year. UNH has an equity summary rating of 9.4 out of 10 for a VERY Bullish outlook.

Fertilizer producer CF Industries Holdings Inc’s (CF) quarterly profit easily beat Wall Street’s expectations due to strong demand for nitrogen during the North American spring planting season as reported on May 5 2012.  Long term, we believe tight global grain stocks will sustain high farm profits, plantings and fertilizer demand.  CF has a dividend yield of 0.99% on a 5% payout ratio.  CF has a 5-year average dividend growth rate of 82%.  UNH increased its dividend 300% in the past year.  CF has an equity summary rating of 9.3 out of 10 for a VERY Bullish outlook.

Herbalife Ltd. (HLF) is a global nutrition company that sells weight-management, nutrition, and personal care products intended to support a healthy lifestyle.  HLF sank to a 52-week low as David Einhorn of Greenlight Capital asked a few questions on the company’s earnings call but had no position in Greenlight’s recent portfolio update.  HLF has a dividend yield of 2.72% on a 25% payout ratio.  HLF has a 5-year average dividend growth rate of 64%.  HLF increased its dividend 50% in the past year.  HLF has an equity summary rating of 9.7 out of 10 for a VERY Bullish outlook.

Access National Corporation (ANCX)) is the parent company of Access National Bank, an independent bank serving the business community of the DC Metropolitan area.  ANCX reported first quarter net income of $3.4 million, a 50.3% increase over the $2.3 millionrecorded in the first quarter of 2011.  This represents the company’s 47th consecutive quarterly profit over its 12 year history.  ANCX has a dividend yield of 2.02% on a 13% payout ratio.  ANCX has a 5-year average dividend growth rate of 43%.  ANCX increased its dividend 100% in the past year.  ANCX has an equity summary rating of 9.9 out of 10 for a VERY Bullish outlook.

Harman International Industries Inc.’s (HAR), the maker of high-end stereo, audio and recording equipment and digital products, has notched top-line growth recently by aggressively expanding into emerging markets and from the benefits of an overall recovery in consumer and automotive spending.  Harman is gaining audio market share in the luxury auto market and has inked deals inChina and India.  HAR has a dividend yield of 0.89% on a 6% payout ratio.  HAR has a 5-year average dividend growth rate of 43%.  HAR increased its dividend 200% in the past year.  HAR has an equity summary rating of 8.5 out of 10 for a Bullish outlook.

UNH Dividend Yield Chart

UNH Dividend Yield data by YCharts

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