The income investor's age-old tech dilemma - we want to invest in industries and companies with a bright future, but, let's face it, tech stocks are downright stingy when it comes to paying dividends.
Alphabet (GOOG) (NASDAQ:GOOGL) is a typical case - although this company had $16.59B, that's billion, in cash as of 6/30/19, and generated $20.65B in levered free cash flow over the past four quarters, management doesn't pay a dividend.
However, if you want to manufacture your own income from GOOG, there are four trades at the end of this article which can help you to do so.
GOOG has had a pretty good year so far in 2019, gaining ~14%, but it has lagged the Technology Spider ETF (XLK) by a long shot - the XLK has gained nearly 2X as much, 28.91%. It also lagged the S&P, which has gained 17.65%.
GOOG has outperformed over the past quarter, rising 13.36%, vs. 8.06% for the XLK, and 3.92% for the S&P, but it has underperformed over the past year, falling -3.02%, vs. a 5.69% gain for XLK and a 1.28% gain for the market:
Revenue has chugged along, gaining nearly 20% over the past four quarters, while diluted normalized EPS is up ~12%, and EBITDA is up 13.57%.
However, levered free cash flow hasn't kept pace - it's down -7.91% over the past four quarters.
Indeed, levered FCF has only risen in 1 of the most recent four quarters, Q1 '19, and it fell again in Q2 '19, down -35.16%.
GOOG's regional segments all had good growth in 2018, with the Asia Pacific area leading the way - it was up 32.1%, followed by the US, which was up 30.34%. EMEA had the slowest revenue growth, but it was still up 23.89% in 2018.
As a percent of total segment revenues, GOOG's regional figures are pretty consistent - the US rose slightly, from 47.34% in 2017, to 48.13% in 2018, while EMEA fell by ~1% to 31.43%, vs. 32.52% in 2017.
The remaining two regions had modest changes, with APAC rising from 14.63% to 15.08%, and Other Americas nearly flat, falling from 5.51% to 5.36%:
So, not a lot of drama in the earnings figures, except for the levered free cash flow decline.
How about EPS vs. analysts' estimates? GOOG has managed to beat EPS estimates for the past four quarters:
In fact, it has received 36 upward EPS estimate revisions for full-year 2019 over the past month, with 21 upward revisions for Q3 '19, and 23 for Q4 '19. Analysts appear to be less sanguine about 2020, however - GOOG has only received one 2020 upward estimate revision.
Maybe that lack of upgrades for 2020, combined with its FCF decline, has had a hand in holding GOOG's price back - as they say... the market looks forward. Of course, the $170M YouTube fine and an upcoming antitrust investigation by attorneys general from more than half of the U.S. states probably aren't helping either.
At its 9/5/19 intraday price of $1203.77, GOOG was 10.83% below analysts' lowest price target of $1350.00 and 13.34% below the average $1389.00 price target.
Not much undervaluation joy here - GOOG seems to be getting premium valuations from the market, which is typical for an industry leader.
These financial ratios provide some backup for those higher valuations - GOOG's ROA, ROE, and EBITDA margin all surpass those of its sector.
Although GOOG has a big goose egg in the dividend department, you can still earn some attractive income, via selling options.
Covered Calls: GOOG has many monthly and even weekly options to choose from. We chose this November $1,260 strike, which gives you some headroom for potential price gains over the next two months-plus.
It pays $28.50, for a 12.17% annualized yield, but, since GOOG can make big $/share moves, there's also the potential that it could blow right past the $1260.00 strike price.
In that case, your shares would be assigned, and you'd end up with a total gain of $84.73/share, comprised of the $28.50 in call option premium, and your $56.23 price gain.
The idea is to sort out how close or far away from the current price/share you want to sell an option. If you're more bullish, you'd sell a covered call at a higher strike price than $1,260, but you'll get paid a lower call premium the further away, (higher), your chosen strike price is from GOOG's price/share.
In general, you'll get paid more by selling an option further out in time.
The January $1260.00 call strike pays $46.20, and it has the same $56.23 price gain potential as the November $1260.00 call strike trade. It yields 10.53% annualized - it pays more money, but it's a longer period of time.
To give you an idea of the large range of options available for GOOG, you could instead match analysts' lowest price target of $1350.00 by selling a January $1350 call strike, which pays $18.80. That's quite a bit less than the $46.20 premium from the $1260 call strike, but if you're more bullish on GOOG, it might suit your needs.
Cash Secured Puts: What if you have little faith in analysts' price targets and you're leery of GOOG falling in price, but you still want a piece of the action? Or maybe you'd like to own GOOG, but a much lower price?
You could sell cash secured puts below GOOG's price/share, and "get paid to wait."
This November $1120.00 put strike pays $23.70, for a 10.88% yield annualized, and it gives you a breakeven of $1096.30, which is ~13% above GOOG's 52-week low, and ~21% below its $1389.00 average price target:
GOOG's January $1140.00 put strike pays quite a bit more, $41.30, as it's further out in time, and closer to GOOG's price/share. It has a yield of 9.94% annualized, with $1098.70 breakeven, which is ~13.3% above GOOG's 52-week low.
The 2 January trades above also have a potential tax deferral advantage: Even though you receive the option premium money in 2019, if the trades aren't closed in 2019, you won't have to pay taxes on that income until mid April 2021.
All four of these trades are tracked daily on our Covered Calls and Cash Secured Puts tables.
All tables furnished by DoubleDividendStocks.com, unless otherwise noted.
Disclaimer: This article was written for informational purposes only, and is not intended as personal investment advice. Please practice due diligence before investing in any investment vehicle mentioned in this article.
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