Chevron (CVX) stock has drifted down 8.6% since its Q1 earnings release at the end of April. As of Thursday, May 18, CVX stock was at $154.01, down from $168.58 on April 28, when Q1 earnings came out.
But that drop has also raised its dividend yield to 3.92% and reduced its P/E multiple to just 11x. That has made it even more attractive to value investors. Moreover, there are ways to enhance the investor's income by shorting out-of-the-money calls and puts.
Last Quarter's Performance
We discussed Chevron's powerful cash flow and large share buybacks in our article on May 2: “Chevron's Cash Flow, 3.78% Dividend, and 5.5% Buyback Yields Attract Value Investors.” Cash flow rose despite lower oil prices and this could occur this quarter as well.
That allows the oil and gas company to keep paying its ample dividend and keep up the share buybacks. For example, the company said it is on target to repurchase a whopping $17.5 billion of its common stock. That represents 5.93% of its $295 billion market cap.
But more importantly, it lowers the shares outstanding, thereby allowing the dividend and earnings to rise on a per-share basis. As a result, it provides more incentive for shareholders to take the long view in holding the stock.
Shorting Out-of-the-Money Puts and Calls for Income
Another way to make income with CVX stock is to sell short, i.e., enter in an order to “Sell to Open” out-of-the-money strike prices in both puts and calls. I discussed this in my last article and noted that the $145.00 strike price puts expiring next week on May 26 traded at the time for 86 cents.
That strike price was about 10% below the spot price but the premium received represented a yield of 0.59% (i.e., $0.86/$145). Today, May 11, those same puts trade much lower at just 22 cents per put contract.
In other words, the trade has so far been very successful, since the investor can now buy back these shorted puts at a much lower price. It makes sense now for the investor to do this and then roll over the same trade for a slightly further out expiration period.
For example, the $140 strike price puts expiring on June 16, 28 days from now, trade for 73 cents per put contract. That strike price is 9.1% below today's spot price of $154.01 for CVX stock which provides good downside exercise protection.
Moreover, this strike price provides a decent 0.52% yield for an investor in this short-put trade over the next month (i.e., $0.73/$140). That works out to an annualized return of 6.27% which can be made on top of holding the stock for a long-term yield enhancement.
In fact, as can be seen above, a less risk-averse investor can short the $145 strike price puts and receive $1.32. That assumes the investor is not concerned the stock will fall 5.85% below today's price. At that strike price, the yield is 0.91%, or 10.9% on an annualized basis, if the trade can be repeated each month for a year.
The same can be done with out-of-the-money call premiums. For example, for the June 16 period, the $165.00 strike price calls trade for $75 cents per call contract. That represents a covered call yield potential of 0.454%, or 5.45% annualized. Moreover, this strike price is 7% over today's price, which means investors can potentially make more money if CVX does not rise over this exercise strike price.
Bottom line: CVX stock has a higher yield and lower multiple and investors can make a good income by shorting out-of-the-money puts and calls.
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.
