Chevron's 4.26% Dividend Yield, Well Covered by Cash Flow, Attracts Value Buyers

Chevron Inc (CVX) stock is down from its highs in the past six months. That has led to a 4.26% dividend yield, attractive to value buyers. This is partly because Chevron's dividend is well covered by its cash flow, as seen in its latest Q3 earnings report.

But more importantly, the stock could be cheap historically, based on its price-to-earnings and dividend yield history

CVX closed at $153.07 on Friday, Nov. 1, down over 7% from its 6-month high of $165.82 on May 10. However, it's up 9.9% from its Sept. 11 low of $137.88. 

Moreover, given Chevron's strong Q3 released on Friday, Nov. 1, CVX stock could rise further. Let's look at this.

Strong Earnings and Cash Flow

Chevron reported strong earnings and cash flow in Q3, although its adjusted earnings per share (EPS) fell from $3.05 last year to $2.51 in Q3 2024.  Lower oil and gas prices and refined margins drove this 17.7% decline in adj. EPS.

However, its cash flow from operations (CFFO) did not decline. It remained flat at $9.7 billion in Q3 - the same as last year. Moreover, that was more than enough to cover the $4.1 billion in capex spending for the quarter, which was down from last year's $4.7 billion spending.

In addition, Chevron's CFFO also covered its quarterly dividend payment of $2.9 billion. In other words, its dividend yield, although high at 4.26% is well covered by the company's cash flow.

That has attracted some value investors to the stock. This is especially true since winter oil and gas prices could rise if global strife keeps supplies tight. 

In addition, its dividend yield and price/earnings metrics are below historical averages. That has led analysts to set much higher price targets.

Price Targets for CVX

For example, Seeking Alpha shows that the 5-year average CVX dividend yield is 3.69%. That is well below its present 4.26% dividend yield - i.e., annual dividend per share (DPS) of $6.52 divided by its price of $153.07 ($6.52/$153.07 = 4.26%).

Therefore, if we divide the $6.52 DPS by its 5-year average of 3.69%, the resulting price target is $176.69 per share (i.e., $6.52/0.0369 = $176.69). That is over +15.4% higher than today's price of $153.07.

However, not all sites agree that its average yield has been this low at 3.69%. For example, Morningstar reports that the average 5-year yield has been just 4.22%. That implies an average upside of just +1.0%, since the price at this average yield will be just $154.50 (i.e., $6.52/0.0422).

However, using average price/earnings (P/E) multiples, CVX stock looks cheap on a historical basis. For example, Morningstar reports that its average forward P/E multiple has been 13.91x over the past 5 years. Comparing that to today's forward multiple of just 13.07x, according to Seeking Alpha, implies CVX stock has room to rise.

For example, by dividing 13.91x/13.07x, CVX stock could end up with at least a +6.43% higher stock price, assuming it rises to the average P/E multiple. That implies that CVX could be worth $162.91 per share.

Therefore, taking the average of these three price targets ($176.69, $154.50 and $162.91), CVX could be worth $164.70, or +7.6% more than today.

Moreover, analysts expect to see CVX rise even higher. For example, the average Yahoo! Finance survey price is $168.50, and Barchart's mean analyst price target is $168.05. 

Moreover, AnaChart, which keeps track of analysts' price targets on a performance basis, reports that 23 analysts with recent price targets have an average of $183.61. That is almost 20% higher than Friday's close at $153.07 (Nov. 1).

One way to play this is to set a lower price target and get paid to wait. That can be done by selling out-of-the-money (OTM) puts in nearby expiry periods.

Shorting OTM Puts

For example, the Nov 29 expiration period, shows that the $145 strike price put has a bid price of $1.41 at the close on Friday, Nov. 1. That implies that the short-seller of these put options for the next 27 days can make almost a 1.0% dividend yield (i.e., $1.41/$145.00 = 0.972%).

Here is what that means. An investor who secures $14,500 in cash or buying power with their brokerage firm can “Sell to Open” 1 contract at this strike price. That money will be collateral if CVX falls to $145 in the next three weeks and the put is assigned to buy 100 shares at $145.00.

But the investor gets to immediately keep $141 (i.e., $1.41 x 100 shares per contract). So, the investment made an immediate yield of 0.97% (i.e., $141/$14,500). If the investor can repeat this income play every 3 and ½ weeks for a year, the expected return is 14.4% (i.e., 52/3.5 x 0.97% = 14.4%). That is a good return and much higher than the stock's 4.26% dividend yield.

But even if CVX falls to $145 - and there is only a 22% chance of this based on its -0.219 delta factor - the investor will buy 100 shares with a net buy-in cost of just $143.49 (i.e., $145-1.41 premium received). That means their breakeven is 6.19% below Friday's close and the dividend yield is higher at 4.54% (i.e., $6.52 DPS/$143.49 net buy-in).

The bottom line is that this is a good way to buy CVX stock. Moreover, the company's strong cash flow and cheap multiple imply that it could be a good long-term investment - or at least for the next 6 to 9 months.

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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.