Chevron (NYSE:CVX) is currently considered a bargain, boasting a forward P/E multiple of 10.2x and expectations of an upcoming dividend hike next month. This positions CVX stock with a forward dividend yield of 4.45%. Additionally, existing shareholders may find opportunities in selling short out-of-the-money (OTM) put options.

As of morning trading on December 5th, CVX stock is priced at approximately $144.00 per share. Since the release of its Q3 earnings on October 27th, the stock has remained relatively stable, closing at $144.35 on that date. Despite recent fluctuations, the stock has essentially maintained its value.

Analyzing Chevron’s free cash flow (FCF) performance, it reveals a 10% FCF margin year-to-date, suggesting a potential adjusted FCF of up to $21 billion next year. Based on a 6% FCF yield, this could result in a market cap of $350 billion, representing a 28.9% upside from its current market value of $271.5 billion. Using FCF, a price target of $185.62 per share is estimated, indicating a 28.9% increase from the current price of $144.

Chevron has a history of raising its dividend annually for the past 36 years, and there are expectations for another increase at the end of January. Assuming a 6.3% hike, the new annual dividend per share could be $6.42, resulting in a forward dividend yield of 4.45%. This attractive yield, along with a potential rise to $153.96 per share (6.9% upside), makes CVX stock appealing to long-term investors.

Analysts project next year’s earnings per share (EPS) to reach $14.15. Considering historical P/E multiples, even using a conservative 11.1x forward multiple, CVX stock could be worth $157.07 per share, indicating a 9.1% increase.

In summary, CVX stock is assessed at $185.62 using an FCF model, $153.96 using a dividend yield model, and $157.07 using a forward P/E model. The average price target of $165.55 represents a 15% upside from the current price of $144. However, achieving this target may take up to a year. To generate extra income during this period, existing shareholders can explore selling short OTM put options.

Selling short OTM puts can provide immediate yields, such as the $135 strike price for the December 29 expiration, offering a 0.385% immediate yield and an annualized expected return of 6.54%. While this return may not be consistently available, it underscores the potential upside of shorting these puts while waiting for CVX stock to rise. Overall, shareholders have the opportunity to potentially earn an 11% expected return, combining the forward 4.45% dividend yield and a 6.54% expected return from shorting near-term expiration OTM puts.

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