Exxon Mobil (NYSE:XOM) stock appears to be particularly appealing to value investors. For starters, it will very certainly increase its dividend in late October. Second, its P/E multiple is quite low in comparison to its history. As a result, options traders can earn from shorting out-of-the-money (OTM) puts.
This approach allows traders to earn additional money in addition to the current 3.34% dividend return on Exxon stock. Those who already possess XOM shares and sell these OTM puts short can increase their dividend yield with additional short-put income.
Dividend Growth Is Likely
That’s because Exxon’s 91-cent quarterly dividend ($3.64 annually) works out to 3.33% on an annual basis at $109.118 per share as of early trading on Aug. 29.
Exxon, on the other hand, has already paid out this 91-cent quarterly dividend for four quarters. That implies it will almost certainly be raised again when the company publishes its forthcoming Q4 dividend at the end of October.
This is because Exxon has worked hard to increase its dividend every year for the previous 24 years. This was particularly tough during the pandemic years. Many other oil and gas equities reduced or did not increase dividends.
Given the 3.4% increase in its quarterly dividend from 88 cents to 91 cents last year, it’s probable that the current quarterly payout will be 94 cents. This equates to an annual rate of at least $3.76 per share.
As a result, XOM stock has a forward anticipated yield of 3.44% at today’s price of $109.18.
Exxon Stock Is Reasonably Priced
On July 28, Exxon released its second-quarter earnings. Granted, its revenue, earnings, and free cash flow (FCF) were all lower than a year earlier and the previous quarter.
However, the corporation is still quite lucrative and can easily fund its dividend and share buyback programs.
Exxon, for example, reported a $8.6 billion FCF before working capital changes (which included a significant one-time $3.6 billion tax payment). This more than covers the $3.7 billion cost of quarterly dividend payments.
The adjusted FCF figure includes the $4.34 billion quarterly cost of the company’s buyback program.
In other words, Exxon shares can easily afford dividends and share buybacks.
Furthermore, XOM stock is trading at a significant discount to its historical average price-to-earnings (P/E) valuation metrics. Morningstar, for example, estimates that XOM stock has had a 16.7x P/E multiple over the last 5 years.
This is significantly higher than today’s P/E. Seeking Alpha, for example, states that the average earnings per share (EPS) of 23 analysts is $9.12. At $109.18 today, XOM stock has a forward P/E of only 12.0x.
This makes long-term holdings of XOM shares particularly appealing to value investors. It also allows you to gain extra money by shorting out-of-the-money (OTM) puts.
Shorting OTM Puts for Extra Income
The September 22 expiration put option chain, for example, reveals that the $104.00 strike price puts trade for 78 cents per put option. That means an investor who sells these OTM puts at a discount of more than 4.7% to today’s price can make a tidy profit.
Here’s how it turns out. The trader first secures $10,400 in cash and/or margin from their brokerage business. Then they can enter an order to “Sell to Open” one put contract for $104.00 on September 22nd.
The account will therefore receive $78.00 immediately as a result of the sold short put option contract trade. This amounts to 0.75% of the $10,400 invested in the trade.
Furthermore, if this is repeated every month for a year, the annualized return is 9.0%. That is why holding 100 shares or more of XOM stock is a good method to boost the 3.44% projected dividend yield.
Furthermore, a more daring trader can sell short the $105 strike price puts. This strike price carries additional risk because it is just 3.81% lower than the current price. The premium received, however, will be $97 per put contract.
The yield is 0.923%, or 11% on an annualized basis, because the trader would have to secure $10,500 with their brokerage firm (just $100 more than the $104 strike price trade). This is a 2% increase over the 9.0% annualized yield on the $104 strike price short-put trade.
The bottom line is that Exxon stock owners can increase their dividend yield by selling OTM puts on this cheap stock.
Featured Image: Unsplash
