Oracle: Great Candidate From Which to Create Synthetic Dividends

May.29.11 | About: Oracle Corporation (ORCL)
Oracle (NASDAQ:ORCL) sits at the bottom of the dividend barrell with a current yield of 0.7%. I can see it already; you’re saying “How can I possibly make money with a yield this low?”
Oracle owner Larry Ellison doesn’t quite have that concern with his 1.1 Billion (yes Billion) shares nabbing him about $500 a minute. However, this technology giant’s low yield leaves the average investor wanting. But ORCL just started making payments in April of 2009 and the payouts appear to be up and coming. For 8 quarters it has held its payout at $.05 a share, until earlier this year when it was bumped up a penny.
Not quite there yet, but a 20% dividend increase is rarely a bad sign, particularly since this growth rate can continue for many years. Add in the 13% payout ratio and ORCL is a definite candidate for future growth. The P/E ratio of around 23 looks high but is slightly below what it was 5 years ago. 37 brokers are looking for a targeted 1-year upside of about 6%, which is consistent with our trading projections.

With a 52-week high of 36.50, we think ORCL shares are likely to bounce around within a mid-30's trading range. To create a synthetic dividend on your shares, we recommend selling the $35 strike calls in the near-term. In particular, we like the June, July, and September expiration covered calls. This strategy will create a synthetic dividend of 9-14% at current options market prices, and leaves investors that 6% upside in share appreciation that brokers are predicting.

Call Options Strike Price at 35.00
Expires Symbol Last Chg Bid Ask Vol Open Int
Jun 11 ORCL110618C00035000 0.23 0.03 0.21 0.23 1167 17677
Jul 11 ORCL110716C00035000 0.67 0.01 0.66 0.68 74 2879
Sep 11 ORCL110917C00035000 1.22 0.01 1.27 1.29 85 12791
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.