Chevron Corp (CVX) had better-than-expected Q1 earnings and cash flow from operations over last year's Q1 results. This makes its 3.78% dividend and 5.5% buyback yields attractive to value investors. As a result, shorting out-of-the-money (OTM) put options for income continues to be popular as well with investors.
On April 28, Chevron reported that its adjusted earnings per share (EPS) was $3.55 for Q1, compared to $3.36 last year. Moreover, this was higher by 14 cents than analysts' expectations, according to Seeking Alpha.
But more importantly, its cash flow increased despite lower oil and gas prices during the quarter. Its cash flow from operations (before working capital changes) was $9.0 billion compared to the same number last year.
This shows that Chevron can afford its large dividend and buyback payments. For example, after spending $3.0 billion on capex, Chevron had $6.0 available for shareholder payments. It spent $2.9 billion on dividends and $3.75 billion on share buybacks, for a total of $6.65 total shareholder returns.
Where This Leaves CVX Stock
This makes CVX stock attractive to value investors as its $6.04 annual dividend produces a 3.78% yield on today's price of $159.58. Moreover, the company's buybacks are on track to be $17.5 billion for the year, according to its earnings release (page 1). Given its $317 billion market value, those share repurchases give shareholders a 5.5% buyback yield (i.e., $17.5/$317 billion).
So, in total, the total yield for existing shareholders is 9.28% given the payments to shareholders, and not including any gain or loss in CVX stock. Moreover, CVX stock has a low forward price-to-earnings (P/E) multiple of just over 11x earnings for 2023 given analysts' forecasts of $14.12 EPS this year.
This is actually lower than the average multiple CVX stock has had over the last two years as well as the last 5 year period, according to Morningstar. This shows why investors are attracted to CVX stock.
Shorting OTM Puts for Income
It also means that shorting cash-secured put options can create additional income opportunities for investors, as I pointed out in my last article on March 28 ("Chevron Stock Is Still Attractive To Value Investors Especially For Shorting Puts.")
For example, in that article, I showed that for the expiration period ending April 28, the $140 puts were worth shorting, especially since they produced 78 cents per puts option in income. Since the stock was above that on the close, the puts expired worthless, which is a success for the short-put investor. They kept 100% of the 0.56% premium-to-strike yield (i.e., $0.78/$140). That works out to an annualized 6.68% return if the trade can be repeated each month.
For example, for the May 26 expiration period, the $145 strike price put options trade for 86 cents today. That produces a 0.593% premium-to-strike yield (i.e., $0.86/$145), or 7.1% on an annualized basis.
This means that if an investor secures $14,500 in cash and/or margin with their brokerage firm, they can enter an order to “Sell to Open” 1 put contract at the $145 strike price. So, even if CVX stock falls to $145, there will be sufficient cash/margin to make the purchase at $145.00 per share. But that means the stock would have to fall over $14.58 per share from today's price, or over 9.3%.
Moreover, there are only 24 days left in this option period so the odds are highly favorable for the short-put investor. That is, given the huge dividend and buyback yield with CVX stock, there is strong pressure for the stock to stay flat or move higher.
The risk is that oil prices tank should a sudden recession occur, or if the Fed has to raise rates dramatically higher. The odds, again favor the long CVX investor and the short-put investor given how cheap the stock is, as we pointed out above. That is likely why the open interest in this strike price has been increasing as seen in the chain picture above.
Bottom line - value investors continue to be attracted to Chevron stock for the long term, as well with short-term income plays like this.
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.
