Income Investors – Google Offers 2 Attractive Alternative Income Streams – Seeking Alpha

This post was originally published on this site

Summary

Google doesn’t pay dividends, but income investors can still earn attractive income streams using certain strategies.

Google has received 35 upward earnings estimates revisions in the past 30 days.

Google has also beaten earnings estimates for the past 2 quarters and many analyst upgrades over the past quarter.

Hey income investors, have you ever wished you could earn some income from market-leading, non-dividend paying stocks? We’ve been covering ways to create income from some of these stocks, such as Facebook (NASDAQ:FB), in our recent articles.

This trail has inevitably led us to newly renamed and reorganized Alphabet Inc. (NASDAQ:GOOGL), the monolith formerly known as Google.

(click to enlarge)

(Source: Google website)

Like FB, GOOGL has trounced the market over the past month, year, and year-to-date, and is sitting very close to its 52-week high:

Alternative Income Opportunities: So, can you have your cake and eat it too, with a high flying stock such as GOOGL (i.e., get some income without having to sell it)? As they say in politics, “definitely maybe.”

If you own GOOGL, you can hedge some of your gains by selling covered calls, which will give you immediate income from the call premium you receive. Or, if you’d like to own GOOGL, you can buy it and then also sell covered call options contracts against your shares to gain immediate income from them. (Each option contract corresponds to 100 shares of the underlying stock.)

We added this March 2016 trade to our Covered Calls Table, which can give you more details about this and over 25 other trades.

(click to enlarge)

There are 2 main income scenarios with this trade — either your shares get assigned/sold away or they don’t.

A: In a “Static” scenario, your shares won’t get assigned/sold, because GOOGL’s price/share doesn’t rise above the $760.00 strike price. Your income would be the $42.00 you received from selling the call.

B: In an “Assigned” scenario, GOOGL’s price/share does rise above $760, and your shares get sold/assigned at or prior to the March 2016 expiration date. Your income would be $45.63, which is the total of the $42.00 in call option premium, plus the $3.63 in price gain, which is the difference between the $760.00 strike price and GOOGL’s $756.37 price/share.

The caveat to selling covered calls is that your price gains are limited to the difference between your price/share and whatever call strike you sell at. So even if GOOGL shoots to $850.00, your price gain in this trade would still only be $3.63, plus the $42.00 in call premium you received. That being said, a 6% nominal yield in around 4 months is still a pretty good return of just under 16% annualized.

You also get the advantage of tax deferral on your call income $ until 2017, if you don’t close the call option position until 2016. Options are taxed as short-term gains, however, even if they’re held for over 1 year.

If you’re more bullish on GOOGL, you could also sell covered call options at a higher strike price to leave yourself more room for potential price gains. You’ll receive less call premium $, so you’d just have to balance out what works best for you — taking more $ up front by selling at a lower strike price, or betting on more price gains.

Another income-producing approach is to sell cash secured put options below a stock’s price/share. If you’d like to own a stock, but you think its current price is a bit high, selling puts below the price/share can create a lower breakeven for you.

Our Cash Secured Puts Table will give you more details for this trade and over 25 others.

This March 2016 $735.00 put option is “out of the money,” i.e., not as close to GOOGL’s price/share as the “at the money” call option above is.

It pays $32.90, which gives you a $702.10 breakeven. If GOOGL goes below $735.00, you’re likely to get shares sold/put to you at $735.00, but your cost is actually $702.10, due to the put premium $ you collected when you opened the position.

If you don’t have GOOGL shares sold/put to you, your income from the trade is the $32.90 in put premiums. In general, shares tend to get assigned near or at expiration time in cash secured put trades.

(click to enlarge)

Earnings: Like Facebook, Google reports both non-Gaap and GAAP earnings, with one of the major differences being exclusion of stock-based compensation in Non-GAAP earnings:

“Non-GAAP operating income and non-GAAP operating margin exclude stock-based compensation (SBC) expense from continuing operations. Non-GAAP net income and non-GAAP diluted EPS exclude SBC expense from continuing operations, net of the related tax benefits, as well as the impact from Net Loss from Discontinued Operations.” (Source: Alphabet website)

GAAP Quarterly Earnings Growth: GOOGL had good results in its Q3 2015 earnings on a GAAP and Non-GAAP basis, and has averaged 20.80% in Diluted EPS growth over the past 4 quarters, which is over twice its GAPP Diluted EPS growth of 10.23% in 2014:

Non-GAAP Quarterly Earnings Growth:

$ Quarterly Figures:

2014 vs. 2013:

GOOGL’s aggregate paid clicks grew 23% in Q3 2015, but its cost-per-click fell 11%:

(click to enlarge)

(Source: Alphabet website)

Earnings Estimates: After 2 misses in Q4 2014 and Q1 2015, GOOGL has beaten EPS estimates for the past 2 quarters. In addition, it has received 35 upward earnings estimate revisions in the past 30 days.

(Source: Yahoo Finance)

It has also received many upgrades and reiterations from research firms:

(click to enlarge)

(Source: Finviz)

Analysts’ Targets: There are 45 analysts covering GOOGL, so you’d think there would be a tighter price target range, but it’s actually quite wide, from a low of $705, -6.79% below GOOGL’s current price, all the way up to $950.00, over 25% above its price.

Valuations: Compared to FB and Baidu, (NASDAQ:BIDU), GOOGL has the lowest P/E valuations, and is near the low end on Price/Sales and roughly in line on Price/Book. Its 27.22 P/E is about in the middle of its 5-year P/E range of 20.37 to 35.99.

Financials: GOOGL has solid Management Efficiency ratios and very little debt, but a much lower GAAP Operating Margin than FB. However, its Non-GAAP margin is 32.6%.

All tables furnished by DoubleDividendStocks.com, unless otherwise noted.

Disclaimer: This article was written for informational purposes only.