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Franklin Resources (BEN) stock is a favorite of value investors as it has a 6.3% dividend yield and a low 9x forward price-to-earnings (P/E) multiple. Moreover, shorting at-the-money (ATM) put options provides an immediate 4.25% yield.
BEN is at $20.35 in midday trading on Friday, March 7, off its recent high of $22.72 on Nov. 25, and up from $19.40 on Jan. 16. I discussed how cheap BEN stock was in my Jan. 27 article, “Franklin Resources Stock Looks Like a Bargain With Its 6.38% Yield.”
Strong Earnings Forecasted
Since then, Franklin Resources, the money management company that manages the Templeton funds, reported its 2024 earnings on Jan. 31. Revenue was somewhat lower than expected, but its net income was still strong.
For example, fiscal Q1 earnings per share (EPS) of 59 cents, 6 cents higher than expected, according to Seeking Alpha. Moreover, analysts now forecast fiscal 2025 EPS (to Sept. 30) of $2.15. Moreover, for the following fiscal year, analysts surveyed by Yahoo! Finance forecast $2.46 EPS.
That means on a run-rate basis, for the next 12 months (NTM) the company is expected to generate about $2.30 EPS. That means that the stock is on a forward multiple below 9x:
$20.25 trading price / $2.30 NTM EPS = 8.8x
This is too low. For example, Morningstar shows that its average 5-year historical P/E multiple has been 11.17x. Moreover, even its forward P/E average multiple has been 9.17x.
So, on average the stock could be worth at least 3.6% more, and potentially up to +26.2% more:
$2.30 NTM EPS x 9.17 = $21.09, or +3.6% higher than $20.35 today;
$2.30 x 11.17 = $25.69, or +26.2% higher
High Dividend Yield
Moreover, BEN stock has a huge dividend yield with its annual $1.28 dividend per share (DPS):
$1.28 DPS / $20.35 = 0.0632 = 6.29%
In my last article, I noted that BEN is trading below its historical 5-year dividend yield average of 4.47%, according to Morningstar. Seeking Alpha says it has been 4.55%.
So, using the higher yield of 4.55%, BEN stock could be worth much more. Here is how that works out:
$1.28 DPS / 0.0455 avg yield = $28.13 per share
This target price is +38.2% higher than its price today.
The bottom line is that using historical P/E and dividend yield averages, BEN stock looks very cheap here.
One way to play this now is to sell short at-the-money (ATM) put options. That way you can set a lower buy-in target price as well as gain extra income while doing this.
Shorting ATM Puts in BEN Stock
I discussed this in my last article on Jan. 27. I discussed shorting the $20.00 put contract expiring on Feb. 21 for 3 weeks until expiration, collecting 55 cents in premium. That provided an immediate yield of 2.75% (i.e., $0.55/$20.00) to the cash-secured put short-seller.
As it turned out, the stock closed at $20.53 on Feb. 21. So, the investor had no obligation to buy shares at $20.00, and the yield was cleanly made for 2.75%. Moreover, if existing investors in BEN stock did this trade they made extra income along with the existing high yield.
This play can now be repeated. For example, the April 17 expiration period shows that the $20.00 strike price has a bid-side premium of 80 cents.
That means that the cash-secured short-seller of these puts makes an immediate yield of 4.0% (i.e., $0.80 / $20.00) for the next 41 days to expiry (DTE).
The point is that shorting at-the-money (ATM) cash-secured puts is an excellent way to gain extra income while setting a lower breakeven buy-in target price. For example, this strike price is less than 1% below today's trading price.
There is also a high delta ratio of 42.8%, indicating that there is almost a 43% chance, based on historical price patterns, that the stock could end up at $20.00 or below by April 17.
So, one way to think of this is as setting a buy-in target price of $19.20 per share (i.e., $20.00 - $0.80 income received). That way the investor has a better chance of making a good return over the long run.
For example, the upside to a $21.09 target price (using the historical forward P/E multiple) is +9.8%. And to the historical dividend yield target of $28.13, the upside is +46.5%.
Moreover, at this breakeven price, the investor has a higher existing dividend yield:
$1.28 / $19.20 = 6.667%
Risks Associated with Shorting Cash-Secured Puts
Keep in mind the risks associated with shorting cash-secured puts. Investors should study these risks by going to Barchart Learning Center and the section on risks associated with put trading.
For example, it's very possible that BENe stock could fall further than the $19.20 breakeven price on or before April 17. In that case, the short-seller of these ATM puts would have an unrealized capital loss.
Moreover, risk-averse investors might want to sell short out-of-the-money (OTM) $17.50 strike price puts. However, the premium for those puts is lower at just 10 cents, providing just a 0.50% yield (i.e., $0.10 / $17.50) over the next 41 days. But that still works out to a good annualized yield of 4.45% (i.e., 365/41 = 8.9 x 0.50% = 4.45% annually), assuming it can be repeated.
Alternatively, the short-seller of the $20.00 puts could also buy $17.50 strike puts for 19 cents. In that case, the net yield is lower (i.e., $0.80-$0.19 = $0.61/$20.00 = 3.05%). But, at least in this case, the investor can not lose more than $1.89 (i.e., $20.00-$0.61-$17.50, or $19.39-$17.50), or just 9.45% of the original $20.00 investment.
Moreover, the advantage is that the investor still gets to keep the shares bought with an average buy-in target price of $19.39, providing an average yield of 6.60% (i.e., $1.28/$19.39).
The bottom line is that BEN stock looks cheap here and value investors love its valuation. One efficient way to play it is to sell at-the-money (ATM) or out-of-the-money (OTM) put options with cash-secured short-put plays.
