Exxon Mobil Corp (XOM), which released its earnings on Friday, April 28, pleased analysts by producing better-than-expected earnings numbers. This is making XOM stock popular with value investors, as it rose to $118.34, the highest point this year. It is especially attractive to investors who have been shorting out-of-the-money (OTM) puts to create extra income.
For example, non-GAAP adjusted earnings per share (EPS) for the quarter was $2.83, much higher than analysts' forecasts of $2.60 per share, according to Seeking Alpha. However, revenue came in slightly lower than last year.
Nevertheless, and more importantly, Exxon generated a massive amount of free cash flow (FCF). This came in at $11.4 billion, which was 5.3% higher than last year's $10.8 billion, as can be seen in the chart below.
Shareholder Returns Excel
This FCF was more than enough to cover Exxon's huge dividend and share buyback payments on behalf of shareholders. For example, its 91 cents quarterly dividend cost the company just $3.738 billion, and its share buybacks amounted to $4.3 billion. In other words, total shareholders' returns were about $8.1 billion, leaving $3.3 billion for debt reduction.
In fact, Exxon's management said that it is still on track to reduce its shareholder count by $17.5 billion this year. That works out to a 3.66% buyback yield, given that XOM stock has a market capitalization of $478.5 billion.
This is on top of the annual $3.64 per share dividend payments, which gives XOM stock a 3.08% dividend yield on Friday's price of $118.34. Altogether then XOM stock is producing a generous total yield of 6.7% for its shareholders. That makes it very popular with investors, especially since it can easily afford to keep these payments.
Moreover, Exxon has now declared the third quarterly dividend at 91 cents, and after the next quarterly announcement, investors can likely expect to see a dividend hike. This is because the company has now had 20 years of continuous annual dividend hikes.
XOM Stock Popular with Short Put Investors
This good earnings report and the company's stellar shareholder return track record have made it popular with investors who short cash-secured out-of-the-money (OTM) put options. They do this to create extra income.
For example, readers of my prior article on April 4, ("Investors Shorting Out-Of-The-Money Exxon Put Options Are Still Making Good Money") saw that the May 5, 2023 expiration puts at the $107 strike price were trading for $1.19 per contract. That yielded over 1.1% based on the put strike price and 1.0% based on the spot price then of $114.51.
Today those put options are trading between 3 and 6 cents per put option. In other words, this short play has been a huge success for the short-put investor. They may now want to roll this over (i.e., covering the short trade by entering in an order to “Buy to Close”). They can now look at slightly further out expiration periods.
For example, the May 26 expiration period, 27 days from now, shows that the $112.00 strike price puts trade for $1.16 per put contract. That provides a premium-to-strike yield of 1.03% and a premium-to-spot yield of just under 1.0% (i.e., $1.16/$118.34=0.98%).
Nevertheless, on an annualized basis, assuming this can be repeated each month, these short put trades produce an 11.7% annualized return (i.e., 0.98% x 12). This strike price is 5.36% below today's XOM stock price, providing good downside protection.
This strike price is popular with investors as there are now 380 open contracts. Another popular strike price is $113.00, which trade for $1.39, providing a 1.23% premium-to-strike yield of 1.23%, or 14.76% on an annualized basis.
This shows that investors can make good money with XOM stock, either by holding it as a long-term investment, making a 6.6% total yield, or by shorting out-of-the-money puts. In the latter case the annualized returns are in the order of 11.7% to 14.8%. This is why XOM stock is attractive to value investors right now.
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.
