Microsoft's Metrics and Option Income Plays Are Appealing to Value Buyers
Microsoft Corp (MSFT) recently hiked its dividend by almost 10%, giving it a 1.0% yield. With its historically low P/E multiple, MSFT stock is cheap. Investors are also attracted to its option income plays.
On Sept. 20, Microsoft announced that its quarterly dividend rose to 68 cents, up 9.7% from 62 cents. It has now raised the dividend annually for 17 years. That brings the annual dividend to $2.72, which has an annual yield of 1.1% at today's price (Oct. 4) of $249.58.
Historically Cheap
This is on par with the average yield of 1.07% in the past 4 years, according to Seeking Alpha. Moreover, the company has been buying back large amounts of its common stock shares, as I recently pointed out in my August 30 Barchart article. This will allow the tech company to keep raising its dividends per share.
In addition, analysts now project that Microsoft will make almost $12 per share for the year ending June 30, 2023. That puts MSFT stock, at $249.58, on a forward price-to-earnings (P/E) multiple of just 20.9x.
That is significantly lower than the company's long-term average multiple. For example, Morningstar reports that MSFT's 5-year average forward P/E multiple has been 28.14x. This implies that MSFT might rise 34.6% just to get to an average forward multiple. That puts its target price at over $414 per share.
Moreover, the stock has attractive income option plays. We can use the target price to help us set a target strike price.
Call And Put Option Income Plays
The Barchart table below shows that for call options expiring Nov. 4, the $280 call options provide a premium of $1.40 per contract.
This means that the investor can make a monthly return of 0.56% (i.e., $1.40/$249.58 price) by selling this out-of-the-money (OTM) strike price call the 31-day forward call option. That represents an annualized return of 6.73%. Moreover, there could be an additional 12.2% capital gain for the investor if the stock rises to $280.00 by Nov. 4.
Selling (OTM) put contracts can also provide option income plays. For example, the table below shows that the $230 put option contracts for Nov. 4 trade for $3.83 per contract.
This means an investor who puts up $23,000 in cash in his brokerage account would make $383 by selling one $230 put contract for expiration on Nov. 4. The immediate return is 1.665% or 20% on an annualized basis. Moreover, the stock would have to fall from roughly $250 to $230 before the investor would be forced to buy the shares at $230 per share.
That means it would have to drop 8% in one month, not too likely given how cheap MSFT stock is now. On the other hand, the short put investor won't make a potential capital gain as the covered call investor can. This is why sometimes investors put on both income trades at the same time.
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