Chevron (CVX) is a bargain given that its forward P/E multiple is 10.2x, and the company is likely going to hike its dividend next month. That gives CVX stock a forward dividend yield of 4.45% yield. Existing shareholders can also still make good money selling short out-of-the-money (OTM) put options.
In morning trading on Dec. 5, CVX stock is about $144.00 per share. The stock has been fairly stable since it released its Q3 earnings on Oct. 27. It closed at $144.35 on Oct. 27, so, in effect, the stock has been flat since then.
In this article, I will show why CVX stock could still be worth 15% more than today, or $165.55 per share.
Chevron's Performance Implies Upside to CVX Stock
I discussed Chevron's free cash flow (FCF) in my Nov. 12 Barchart article, “Chevron's 4.2% Dividend Yield and Low 10x P/E Multiple Make It Cheap.” Despite the lower FCF performance during the quarter, Chevron has had a 10% FCF margin year-to-date.
If that keeps up, estimates are it could produce up to $21 billion in adjusted FCF as analysts project revenue of over $211 billion next year. Therefore, based on a 6% FCF yield, Chevron could end up with a market cap of $350 billion.
In other words, if we divide $21 billion by 6%, the resulting target market cap is $350 billion. This target market cap is $78.5 billion higher than its existing $271.5 billion market value. That implies an upside of 28.9% in the stock (i.e., $78.5b/$271.5b).
In other words, using FCF we can estimate a price target of $185.62 per share (i.e., 28.9% over today's price of $144).
Dividend Yield and P/E Multiples Inexpensive
Chevron has raised its dividend every year for the past 36 years. It is likely to do so again at the end of January when it announces its next quarterly dividend.
The present annual dividend per share (DPS) is $6.04. Last year it hiked the DPS by 6.34% and the prior year it was up 7.58%. So, assuming Chevron hikes the dividend by 6.3%, the new annual DPS could be $6.42.
That gives CVX stock a forward dividend yield of 4.45% or so (i.e., $6.42/$144.00). That makes it very attractive to long-term investors. For example, Morningstar reports that its trailing 12-month (TTM) yield has been 4.17%.
So, assuming CVX stock ends up with this yield, it could rise to $153.96 per share. This is seen by dividing the forecast DPS of $6.42 by 4.17%. That target price represents an upside of 6.9%.
Similarly, analysts estimate that earnings per share (EPS) next year could rise to $14.15. Morningstar's 5-year average P/E multiple is 39.78x.
But that is skewed by the 2020 P/E of 31.65x figure. Excluding that data point, the average P/E multiple over the last 4 years has been 12.6x. Even using the last 3 years (including 2023), the average forward multiple is 11.1x.
This implies that CVX stock is worth $157.07 per share or 9.1% over today's price.
The bottom line is that CVX stock is worth $185.62 using an FCF model, $153.96 using a dividend yield model, and $157.07 using forward P/E. That provides an average price target of 165.55. This is 15% over today's price of $144.00 per share.
However, that could take a year before this price target is reached. Existing shareholders have ways to make extra income while waiting for this to happen.
Shorting OTM Puts for Income
One way is shareholders can sell short out-of-the-money (OTM) put options in near-term expiration periods to make extra income.
For example, the Dec. 29 option expiration period shows that the $135 strike price is attractive. This strike price is over 6% below today's stock price and a little over 3 weeks from today. The premium is attractive at 52 cents per put option contract.
That provides an immediate yield of 0.385% to the short-seller of one put contract (i.e., $0.52/$135.00).
That works out to an annualized expected return of 6.54% assuming it can be repeated every 3 weeks. This is seen by multiplying 0.385% by 17 since there are 17 periods of 3 weeks in a year. This return may not be available every 3 weeks, but it shows the potential upside today of shorting these puts.
The bottom line is that shareholders can make a potential 11% expected return waiting for CVX stock to rise. This is both from its forward 4.45% dividend yield and also from a 6.54% expected return from shorting near-term expiration OTM puts.
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.
