Chevron Corp (CVX) stock has bottomed out. Investors expect the company will hike its dividend by at least 6% in January, giving it a 4.3% yield. Shorting OTM puts is also a good income play for shareholders.
In morning trading on Tuesday, Dec. 19, 2023, CVX stock is at $150.37. This is up from its recent low of $142.40 on Nov. 8. Moreover, the stock's chart clearly shows that it is on the upside curve of a U shape.
Investors are anticipating that Chevron will hike its dividend. I discussed this in my recent Dec. 5 Barchart article, “Chevron Looks Like a Bargain With a 10x P/E, a Likely Dividend Hike and 4.45% Yield.”
The company has raised its dividend every year for the past 36 years. At the end of January Chevron could likely hike the $6.04 annual dividend payment by at least 6.3% to $6.42 per share.
So, at today's price of $150.37, that would give investors an annual yield of 4.27%. This is higher with its average yield over the last 12 months, according to Morningstar, which says the average yield has been 4.04%.
Further Upside in CVX Stock
So, for example, if CVX stock were to rise to have a 4.04% yield the stock price target would be $158.91. That can be seen by dividing $6.42 by 4.04%. This means there is at least a 5.7% upside in CVX stock.
Moreover, according to Seeking Alpha and its survey of 24 analysts, CVX is trading for just 11.2x this year's forecast earnings per share (EPS) of $13.35. And next year it's at just 10.4x EPS forecasts of $14.39. That is very cheap.
For example, as I pointed out in my previous article, the stock has had an average multiple of 11.1x in the last 3 years. That puts its price target at $159.73. That implies an upside of 6.2%.
Lastly, using a free cash flow (FCF) valuation method, we estimated CVX stock is worth $185.62 per share, or 23.4% more.
The bottom line is that the average price target is $168.09 per share, or 11.8% more than today.
Shorting OTM Puts for Extra Income
One way existing shareholders can make extra income is by shorting out-of-the-money (OTM) put options in near-term expiry periods. For example, on Dec. 5, I recommended shorting the $135 strike price put option for the Dec. 29 expiration period.
At the time, the strike price was over 3 weeks out and 6% below the spot price of $143.51, so the OTM protection was excellent. Moreover, the premium received was 52 cents. That provided the short seller with an immediate yield of 0.385%, or an annualized expected return (ER) of 6.54% (i.e., 0.385% x 17) as there are 17 periods of 3 weeks in a year.
Today, the premium has fallen to just 4 cents, giving the investor an excellent return. The investor may want to roll this over (i.e., buying back the short put trade) and reinvest the cash secured for that trade in another short put expiration period.
For example, the Jan. 12 expiry period (24 days away) shows that the $140 strike price, 3% out-of-the-money, has a bid side premium of 37 cents. That provides a short seller with an immediate yield of 0.264%.
On an annualized ER basis, that works out to 3.96%. That is because there are 15 periods of 24 days in a year, so 15x 0.264% equals 3.96%. This is almost equal to the annualized dividend yield of 4.26% (see above).
In other words, it's possible that shareholders can short OTM puts and double their annual income. This assumes that the stock does not fall to the strike price at any time during the coming year. (Note also that the $145 strike price, which has a lower OTM space of 3.72% has a much higher premium of $1.06 per contract. That gives investors an immediate yield of 0.73%).
There is some risk that this would occur. But shareholders would be obligated to buy more shares, not give up any of the ones they already own.
The bottom line is that CVX stock looks to have bottomed out. Its dividend is likely to rise. The stock could rise as a result. One way shareholders can make money while waiting for this to happen is to short 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.
