Chevron (CVX) stock has been upgraded by 2 major buy-side firms, given its 4.0% dividend yield and low P/E multiple. Value buyers are attracted to CVX stock, given its defensive qualities. This includes shorting its out-of-the-money puts for extra income.
I discussed this in my May 19 article, “Chevron Stock Is Off Since Its Q1 Earnings, But Its 3.92% Yield And Low P/E Make It Attractive.” At the time, CVX stock was at $154.01 as of May 18, but now as of June 1, 2023, CVX stock is slightly lower at $152.16 per share.
That has pushed its annual dividend yield to 3.97% (i.e., $6.04/$152.16), and lowered its price/earnings (P/E) multiple. Analysts now forecast 2023 earnings per share (EPS) of $14.21, setting its earnings multiple at 10.7x for 2023. The same analysts project 2024 EPS of $14.62, lowering the P/E multiple to 10.4x.
Cheap Stock with a Strong Balance Sheet
This makes the stock cheap indeed. Moreover, two recent analyst reports suggest that Chevron's strong balance sheet and reliance on upstream revenues give it good defensive qualities.
For example, Chevron has over $16 billion in cash, including restricted cash, as well as $46.2 billion in long-term investments. This compares with just $23 billion in short and long-term debt.
Moreover, its latest quarterly cash flow from operations was $9 billion. That more than covered the $3 billion spent on capex and $2.9 billion spent on dividends as well as $3.75 billion spent on share buybacks.
In fact, Chevron is on track to spend $17.5 billion on share buybacks this year, which undergirds the stock. Moreover, it allows earnings and dividends per share to rise. For example, this amount represents 6.1% of its $285.4 billion market capitalization.
In other words, CVX stock has a 6.1% buyback yield, as well as a 3.97% dividend yield. That produces a total yield to shareholders of 10.0%, a very attractive ongoing return for value investors.
Shorting Out-of-the-Money Puts for Extra Income
In my last article on May 19, I showed that investors could make extra income by shorting out-of-the-money (OTM) put options. For example, for the June 16 expiration period, the $145 strike price puts traded for 1.32 cents per put contract. That produced a premium-to-strike yield of almost 1% (i.e., $1.32/$145.00=0.938%), or 11.3% if this trade is done each month for a year.
Today, those puts are lower at just $1.00 at the midpoint, giving the investor a profit already of 32 cents per contract. This is despite the fact that the stock has fallen almost $2.00 in the last 2 weeks.
Moreover, it might sense to go out a bit further and sell short the June 30 expiration $140 strike price puts. They trade for a similar price of 98 cents, but the strike price is further away (8% below the spot price of $152.16). That lowers the risk and gives the value investor a similar 0.7% yield (i.e., $0.98/$140).
For example, the investor could close out the existing short put $145 strike price contract expiring June 16 by buying it back (i.e., entering an order to “Buy to Close”. Then they could can enter an order to “Sell to Open” one put contract at $140 for $0.98 at the $140 strike price for expiration on June 30.
This works out to an annualized rate of return of 8.40%. So, for the long-term investor who has a long position in CVX stock, it adds to the 4.0% yield they will earn. This shows that the long-term investor can potentially produce 12.4% of income over the next year by shorting these out-of-the-money puts and collecting its quarterly dividends.
That makes CVX stock very attractive to value investors.
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.
