During current market conditions, with many macro-economic problems and equity markets up significantly over the last two years, many investors are looking for a more careful and conservative approach to making equity investments.
We would like to highlight an interesting investment opportunity using equity options which provides investors an attractive rate of return as well as a significant margin of safety.
A lot of research had been published emphasizing that Intel is a solid long-term investment, a good value, blue-chip stock. We will not repeat all the analysis and valuation numbers here as the reader can easily find them in many other articles, reports, and news items. There are, however, two points which we believe are worth mentioning: recent Q1 results/share performance, and dividend/buyback program.
On May 11th Intel raised its dividend 16% to $0.21/share, giving shares a yield of 3.6%, up from 3.2%. In addition to dividend, Intel has an active share repurchase program and has bought back $8.6 Bil worth of stock over the last 3 years. This is comparable to an additional annual yield of 2.3%. During first quarter of 2011 Intel repurchased $4 Bil worth of stock, which is comparable to 3.2% yield (based on a current market cap of ~$126 Bil), all this in addition to the regular quarterly dividend of 3.6%.
On Apr 19th Intel reported Q1 2011 results, easily beating analyst expectations (http://www.businesswire.com/news/home/20110419007196/en/Enterprise-Strength-Products-Drive-Record-Intel-Results). Many analysts responded by upgrading and raising price target on stock. Shares rallied ~18% since then, outperforming S&P 500 by over 15%.
If the investor wants to make an investment in Intel, at least on the merit of an attractive dividend yield it provides, he might find the strategy of selling out-of-the-money put options suitable for this purpose. For example, Jan 2012 $21 Put option can be sold for $1.12 providing a 5.3% return (or 7.66% on an annualized basis). This compares favorably to the current dividend yield of 3.6%. By selling a cash-secured (covered) put option investor essentially sells an insurance policy on a stock and agrees to buy Intel at $21 (current market price is $23.41). In return for agreeing to do so, investor receives a profit in the form of the option's premium. In case INTC declines below $21, the effective purchase price will be $19.88, - thus providing investor with a margin of safety of about 15.6% (which is significant given that S&P 500 declined 40% during stock market crash of 2008).
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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