Few companies can claim they actually contributed to changing the world. But less than 30 years ago, Microsoft (NASDAQ: MSFT) and Intel (NASDAQ: INTC) did change the world as they defined the standards for personal computers (PCs).
With Intel providing the hardware standards and Microsoft defining software, those two companies made the widespread acceptance of the Internet possible.[ad#Google Adsense 336×280-IA]Today, these two companies are still leaders in their markets, but they have become more like stodgy utility companies than the growth juggernauts they were decades ago.
Both now trade with low price-to-earnings (P/E) ratios and significant dividend yields.
Of the two, I think INTC is the more attractive investment option.
Intel is the world’s largest chipmaker and has been for 20 years.
According to Computer World, the company accounts for about 17% of the sales in the $307 billion semiconductor market.
While PC sales are slowing, they are still significant, and INTC is unlikely to lose its dominant position in the industry in the near future.
Analysts following INTC do seem to think the company’s best days are in the past. They expect to see earnings per share grow at about 12% a year over the next five years, less than half the growth rate of 28% a year INTC achieved in the past five years. Based on next year’s estimated earnings, INTC is trading with a P/E ratio of about 10 after recently falling to a new 52-week low. The stock is now priced at a level that should make the company attractive to value investors.
In addition to the low P/E ratio, value investors may also like the rich 4.6% dividend yield that INTC offers. The dividend appears safe, with the payout requiring only about 45% of the company’s earnings. Traders may overlook INTC because the prospects of a short-term gain in the stock price seem low; however, the dividend yield supplemented with a covered call options strategy could deliver double-digit gains.
Covered calls are call options sold against stocks that you own. It is a strategy that can be used to increase income. To write a covered call on INTC, you will first need to buy at least 100 shares of the stock. Each options contract will be for 100 shares, and to be covered you should own enough shares of the stock to deliver the stock if it is called away.
A call option would be called by the buyer if the stock’s market price rises above the option exercise price. In this case, you sell the stock at the agreed upon price at a profit and keep the options premium received when the call was written as additional profit.
If you are confused on the concept of covered calls, looking at the specifics for INTC should help you better understand the strategy.
At the time of this writing, INTC is trading at about $20. A call option with a strike price of $21 expiring in January is trading at about $0.32. Buying 100 shares of INTC would cost $2,000 and selling the call would generate $32 in income, in effect reducing the cost of INTC to $19.68 a share.
When the call expires at the close on Jan. 18, if INTC is below $21 a share, you are free to sell another call. In that case, the profit on the January call would be 1.4% for a seven-week holding period, or 10.36% on an annualized basis. If you continue writing calls for that same amount as they expire, you should be able to receive income of about 14.96% a year when the call premiums are added to the 4.6% dividend yield.
If INTC is trading above $21 when the options expire in January, you will be forced to sell the stock for $21 and accept a gain of 6.7% for the seven weeks that the position was open.
Covered calls on value stocks with stable dividends could be a high income strategy for traders to consider. INTC offers an excellent example of how this strategy could be implemented.
Recommended Trade Setup:
— Sell one INTC Jan 21 Call at the market price for each 100 shares of INTC bought at the market
— Do not use a stop loss. This is a stock that can be held for the long-term.
— The profit objective is income of 1.4% in seven weeks if INTC declines or is unchanged, or a 6.7% profit if INTC rises above $21 and shares are called away
— Amber Hestla-Barnhart[ad#sa-income]