Chevron Corp (CVX) has been on the move in the past several weeks as the price of oil has been rising. As of Friday, Sept. 8, it closed at $167.21, up almost $10 from its low of $157.93 on Aug. 24.
This is also partly because CVX stock is still cheap as well. Moreover, short sellers of its puts are making good income.
I discussed Chevron's inexpensive valuation in my Aug. 20 Barchart article, “Chevron Stock Still Looks Cheap To Value Investors and Short-Put Traders.” For example, as it stands now, CVX is at 12.4x earnings forecast for 2023 and 11.7x for 2024.
Expect a Dividend Hike Soon
In addition, given its $6.04 annual dividend per share, CVX stock has a dividend yield of 3.61%.
Investors know that Chevron could raise its dividend after the upcoming dividend announcement at the end of October. This could happen by the end of January. But the market will anticipate this earlier.
For example, Chevron has raised its dividend annually for the past 35 years. As a result, its annual rate could move at least 5% or so higher to $6.34. That implies its forward dividend yield is actually higher at 3.79% (i.e., $6.34 / $167.21).
Moreover, it might hike the dividend by more than 5%. For example, last year it rose from $1.42 quarterly to $1.51 (i.e., $5.68 annually to $6.34 per share). That was a gain of 6.34%. But just to be conservative that 5% hike is likely to happen.
One reason is that analysts expect earnings per share (EPS) will rise to $14.29 next year, up 6.0% from the $13.47 forecast for this year. In other words, a 5% dividend hike tracks its earnings forecasts.
Moreover, its free cash flow (FCF) could support an even higher dividend hike. For example, the company said its Q2 FCF before working capital was $5.7 billion. That was significantly higher than the quarterly cost of its dividends which was just $2.8 billion.
Shorting OTM Puts Makes Sense for Shareholders
I wrote in my last article that shorting the Sept. 8 expiration puts at the $150 strike price would produce extra income for long holders of CVX stock.
That strike price was 6.77% out-of-the-money (OTM), which means it was well below the then-spot price. That means there was good downside protection for short sellers of those puts.
The net result was that CVX stock closed at $167.21 on Sept. 8, and those puts expired worthless. That means the short sellers of those puts made good money.
For just three weeks they made a return of 35 basis points, since 53 cents received from shorting the puts divided by the $150 strike price (the investment) was 0.35%. Annualized that works out to 6.0% since there are 17 three-week periods in a year.
Long shareholders in CVX stock might want to repeat this trade, and perhaps even take on a little more risk earning a higher yield. For example, the Oct. 6 expiration put option chain shows that the $160 strike price puts trade for 94 cents. This expiration is 27 days from today.
This strike price is just 4.3% below today's spot price of $167.21. But it earns a higher yield of 58.75 basis points (i.e., $0.94/$160 = 0.5875%). That works out to an annualized rate of 7.05% if it is repeated each month for a year.
Let's be clear about this. If CVX stock falls to $160 or lower on or before Oct. 6, the short-put trader will have his puts exercised. That means that the $16,000 that was secured (per put contract that was entered as a “Sell to Open” trade) will be used to buy 100 shares at $160.
But, if a shareholder already owns the stock, this means they will potentially have a lower or higher average cost. Keep in mind that the short put trader gets to keep the 94 cents income. That means the breakeven price is $159.06, or almost 5% below today's price (4.87% below $167.21).
The point is that, along with the expected dividend hike, long-term shareholders can enhance their income by shorting out-of-the-money put options.
On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
