BBT: BB & T Corp. offers generous 7.47% yield; raises dividend

BB & T Corp. (BBT), a Winston-Salem-based bank holding company, has raised its quarterly dividend to 47 cents a share from 46 cents a share, showing its confidence in its ability to do well in today’s shaky credit markets. This brings projected annualized yields as of this writing to a generous 7.47%.

http://www.dividends4life.com calls BBT a four-star buy here.

Morningstar.com calls BBT a four-star stock and estimates its fair value at $43. The stock is trading at $25.18, or about 59% of its estimated fair value. Even if it takes two or three years to achieve that estimated fair value, an investor will achieve a very respectable total return of 20% to 27% a year, assuming dividends continue to grow.

An options trader can achieve even greater returns by both buying, say, 100 shares of BBT for $25.18 per share and selling one BBT July 27.5 (strike price) call option for 81 cents. Such a trade provides an immediate return of 3.22% on the stock purchase after commissions. This works out to an annualized return of about 51%, assuming no change in the stock price and that a new call option can be sold in each subsequent month after the July call expires. Add the 7.47% annual dividend and the total annualized return is over 58%, which most likely is too good to be true but worth shooting for. By buying an out of the money covered call, a trader is more likely to see the call option expire worthless and to continue holding the BBT stock and collecting its dividend.

If a trader buys 100 BBT for 25.18 and sells one BBT July 25 call for $1.70 per share, the annualized covered call return would be about 106% with 23 days to expiration. The risk here is that by buying an in the money covered call, the stock is more likely to be at or at the $25 strike price when the call option expires. As a result, the call buyer would be able to buy the stock for $25, regardless of whether it was trading for $25 or much higher. If the stock is called, the total return would be about 90% annualized.

Writing covered calls is risky and for nimble traders who watch their positions very closely and can execute trades on their personal computers. While covered calls limit profits, they don’t limit losses.

Buyers of BBT calls that expire in January 2009 25 calls think the stock will touch or top $28 before the options expire in mid January. Bearish buyers of BBT January 2009 25 puts think the stock could touch $21.

Technically, BBT’s charts are bearish, which means investors aren’t convinced the stock is a buy. The stock’s point and figure chart has a bearish price objective of $6.

BBT’s hourly, daily, weekly and point and figure charts are here.

This is a bank holding company, after all, and despite today’s rally in banks’ shares, they are very much out of favor in this bear market.

I own BBT covered calls, which I bought today.

For educational purposes only. Investigate before you speculate.

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