Chevron’s Potential Upside and Income-Generating Strategies

Chevron Stock

Chevron (NYSE:CVX) is currently positioned as a compelling investment opportunity, boasting a modest forward P/E multiple of 10.2x and the likelihood of an upcoming dividend hike, resulting in a tempting 4.45% yield. Additionally, existing shareholders can explore income-generating avenues, such as selling short out-of-the-money (OTM) put options.

Assessing CVX’s Current Standing

As of December 5, CVX stock trades around $144.00 per share, having maintained relative stability since its Q3 earnings release on October 27. Despite a recent 9% decline, the forward P/E of 10.2x and anticipation of a dividend hike contribute to its attractiveness.

Potential Upside Based on FCF

While Chevron experienced lower free cash flow (FCF) in the recent quarter, its 10% FCF margin year-to-date raises optimism. If this trend continues, analysts estimate adjusted FCF could reach $21 billion next year, supporting a potential market cap of $350 billion. This implies an upside of 28.9%, projecting a target stock price of $185.62.

Dividend Yield and P/E Multiples Analysis

Chevron’s impressive track record includes raising its dividend for 36 consecutive years. Assuming a 6.3% hike in the upcoming dividend announcement, the forward dividend yield would be approximately 4.45%. This aligns with Morningstar’s trailing 12-month yield of 4.17%, suggesting a potential stock price increase to $153.96, presenting a 6.9% upside.

Analysts estimate next year’s earnings per share (EPS) could rise to $14.15. Considering historical P/E multiples, an average forward P/E of 11.1x indicates a potential stock price of $157.07, offering a 9.1% upside.

Average Price Target and Income Strategies

Utilizing different models, the estimated stock price targets are $185.62 (FCF model), $153.96 (dividend yield model), and $157.07 (forward P/E model). The average price target of $165.55 suggests a 15% potential increase from the current price of $144.00 per share. However, this growth may take up to a year.

For existing shareholders looking to enhance income while awaiting potential gains, selling short OTM put options is an option. For instance, the $135 strike price with a premium of 52 cents provides a 0.385% immediate yield, equivalent to an annualized expected return of 6.54% if repeated every three weeks.

In summary, Chevron appears undervalued, presenting opportunities for capital appreciation and income generation. Investors may consider a multi-faceted approach, combining potential stock appreciation with short-term option strategies to optimize returns.

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