As investors, we face a great deal of uncertainty. We don't know who the next President will be or which party will control the House or Senate. We don't know when, or even if, the Federal Reserve will raise rates. We don't know how far other central banks around the world will take negative interest rates.
Personally, I don't expect much to change in the next few months. Interest rates will remain low and elections will continue to be held. Any changes to the current political and economic environment are likely to be small.
This means, as investors, we can remain focused on finding high-quality stocks with higher-than-average income, like the recent recommendation I made to my Maximum Income premium readers, Ford Motor (NYSE: F).
|The Next Epidemic (It Isn't Zika Or Ebola)...
While Zika and Ebola steal headlines, a much more dangerous epidemic has been developing in our hospitals. The CDC barely mentions it. But a NASA scientist, a Harvard MD, and a Johns Hopkins surgeon have shown that it's claiming more lives than strokes, Alzheimer's, and diabetes -- combined... Full story here.
Ford is a company that needs no introduction. That, in a nutshell, is exactly the appeal of this name.
Ford Chief Economist Bryan Bezold noted sales seem to have plateaued after steadily rising following the 2008-2009 recession. He said he believes the auto industry outperformed the overall U.S. economy in those years largely due to pent-up demand that has now played out. Ford now expects vehicle sales to be lower in 2017 as well..
The good news is that management said it can make money at a significantly lower level of sales. Ford's CFO recently told analysts the company could break even financially if annual U.S. auto sales fall as low as 11 million -- a 37% decline from last year's record.
Profitability, even when sales are low, is expected to be a result of Ford's ability to lower its costs as demand declines. The company believes it can cut costs by $3 billion during the first year of an industry downturn and could even improve profits during the second year if the downturn continues.
The fact that Ford has a plan in place to weather a downturn is a huge positive for shareholders. It's safe to say that most companies didn't plan for the worst before 2008. The fact that Ford (and many other companies) are thinking through and preparing for extreme stress should be bullish for investors.
And strong operating results should help the company absorb smaller doses of bad news, such as the recall related to faulty door latches. Earlier this month, Ford cut its 2016 pretax profit forecast from $10.8 billion to about $10.2 billion due to the recall turning out to be more expensive than anticipated.
The company now expects the recall to cost about $640 million, which will be taken as a charge against third-quarter earnings. But analysts still expect the company to report earnings per share (EPS) of $1.82 this year and $1.77 next year. To be conservative, let's use the most pessimistic forecast for our price target, which is EPS of $1.52 next year.
EPS growth is expected to average 9% a year. Assigning a price-to-earnings (P/E) ratio of 9 to next year's earnings gives us a price target of $13.68 ($1.52 x 9 = $13.86). That's about 13% above current prices. The stock also pays a dividend of $0.15 a quarter, good for an annualized yield of about 5%.
Now, buying Ford at this time and at these levels makes sense. After all, as I pointed out, the company isn't going anywhere and is in fact preparing for more challenging times ahead. But rather than simply buying shares and waiting for capital gains and dividend payments, my Maximum Income subscribers and I are getting paid instantly.
We do this by selling covered calls. Based on a recently recommended trade, we were able to generate 2% in what I like to call "instant income." What's more, by doing so, we lowered our cost basis on the shares. Not only that, but even if shares don't go anywhere, if we can repeat a similar trade every three months, we could earn a 7.7% return on our capital in 12 months. That's in addition to the 5% dividend yield.
And if Ford is trading the $13 strike price of our call option on Dec. 16, we'll keep the income we received from selling the call option and sell the stock at $13 per share. In this case, we'll make an annualized profit of 12.5%, including dividends.
As I've mentioned before, selling covered calls is as close as it gets to a win-win in investing. It's also one of the most conservative methods of earning extra income to be found.
So while you can buy and hold a stock like Ford in this climate and feel reasonably comfortable, why settle? If you're interested in learning more about how covered calls work, I invite you to follow this link. You won't be disappointed.