Chevron Corp (CVX) stock still looks inexpensive here with its 4.05% dividend yield and forward earnings multiple of 12x. As a result, CVX is worth substantially more, as much as $185.23 per share, or an upside of 15% from today. Moreover, it makes sense for existing shareholders to short out-of-the-money (OTM) put options for extra income.
The oil and gas company raised its dividend per share (DPS) higher than expected to $6.52 per share on Feb. 2. I had previously predicted in my Jan. 19 Barchart article that it would raise the DPS by 6.3% from $6.04 to $6.42. Instead, Chevron hiked it by almost 8% (7.95%). This indicates the company has high confidence in its free cash flow generation.
So, at today's price of $161.09, CVX stock now yields over 4.0% (i.e., $6.52/$161.09 = 4.047%). This has strong implications for the stock's upside.
Upside in CVX Stock Based on Its Yield
For one, Seeking Alpha indicates that the stock has had an average dividend yield of 3.25% over the last 5 years. This can be seen in the chart from Koyfin below where the part in yellow is where the yield has been below today's 4.0% yield in the past several years.
The point is that if CVX stock were to be valued at this average yield the price has to be higher. Here is how that works:
$6.52 DPS / 0.0325 Avg Yield = $185.23 per share
That means that if CVX were to rise by 15% from today's price of $161.09, it would have a dividend yield of 3.25% at today's DPS rate.
Moreover, over the next year, investors can likely expect that the company will raise its dividend again. Chevron has hiked its dividend every four quarters for the past 36 years.
Upside Based on Earnings and Analysts' Targets
In addition, analysts now project $13.58 in earnings per share (EPS) this year and $15.66 next year, according to Barchart estimates. Other surveys show lower EPS estimates of $13.11 and $14.42, respectively at Seeking Alpha and $12.15 and $13.62 at Yahoo! Finance (Refinitiv or Morningstar data).
This shows that there is a wide range of forward EPS estimates. The average seems to be about $13.00 for 2024 and $14.57 for next year. That puts it on a run rate EPS of $13.79 over the next 12 months (NTM). As a result, the stock is trading on a cheap forward multiple of just 11.7x going forward.
This is consistent with the stock's long-term multiple averages. For example, Seeking Alpha reports that its average forward P/E multiple over the past 5 years has been 12.21x. That implies that CVX stock is worth $168.38 per share:
$13.79 NTM EPS x 12.21x = $168.38.
This represents a potential upside of 4.5% from today's price.
Analysts also agree with the upside in the stock. For example, Yahoo! Finance's summary page shows that the average price target of 23 analysts is $169.82 per share. In addition, AnaChart, a new sell-side analyst tracking service, shows that the average price target of 27 analysts is $189.43 per share. ‘That represents a 17.6% upside in CVX stock and is close to my $185.23 price target based on the stock’s average dividend yield above.
The bottom line is that CVX stock looks undervalued here based on its average historical metrics. One way to play this is to short out-of-the-money (OTM) put options to gain extra income and buy in cheaper.
Shorting OTM Puts in CVX Stock
For example, look at the May 10 expiry period for CVX put options, an expiration period 18 days from now (less than three weeks). It shows that the $155.00 strike price put options trade for $1.19 on the bid side. That means that an investor who sells short these puts can make an immediate yield of 0.768% (i.e., $1.19/$155.00).
Here is how that works. The investor secures $15,500 with their brokerage firm in cash and/or margin. This allows the account to buy 100 shares at $155.00 if the stock falls to that price on or before May 10.
They then enter an order to “Sell to Open” 1 put contract at $155.00 for expiration on May 10. The account will then receive $119.00. This represents 0.768% of the $15,500 invested in this short play.
If the stock stays over $155.00 on or before May 10, the account will not be obligated to buy 100 shares at $155.00. But no matter what happens, the investor still keeps the $119 income. So, their breakeven price is $155.00 - $1.19 per share, or $153.81. That is about 4.5% below today's price.
As a result, it represents a cheap way to buy into CVX stock. For example, at this breakeven price, the prospective dividend yield is 4.24% (i.e., $6.52/$153.81 per share breakeven). That makes this a bargain way to buy into CVX stock.
Moreover, if the investor can repeat this play every three weeks for a quarter, they stand to make an expected return (ER) of $476 (i.e., $119 x 4). That represents an ER of over 3.0% (i.e., $476/$15,500 = 3.07%) in just 90 days. This is a good way for existing shareholders to enhance their long-term investment in CVX stock.
It is also better than selling OTM-covered calls in case the stock rises. That forces the investor to sell their shares if the price rises over the strike price. By shorting OTM puts investors only have an obligation to buy more shares.
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.
