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Phillips 66 Is Attractive With Its High Yield and Covered Call Income Plays

Barchart - Tue Sep 6, 11:23AM CDT
Energy - Drilling for Oil in Sunset

Phillips 66 (PSX) is an undervalued oil and gas stock that trades for less than 6x earnings this year and has a 4.41% dividend yield. Moreover, call option prices for one-month forward strike prices offer very high premiums and additional high-yield covered call income plays.

The company has paid two quarterly dividends at 97 cents per share. This puts the stock on an annualized dividend yield of 4.40% at today's price of $88.17. However, Phillips 66 has sometimes raised its dividend on a quarterly basis, so there is a possibility the yield could rise.

Nevertheless, over the past 4 years, the average dividend yield has been 4.15%, according to Seeking Alpha. This implies that the stock price could rise to $93.49 (i.e., $3.88/0.0415 = $93.49). This is a potential gain of 6% in the stock price assuming it trades at the average dividend yield from the past 4 years.

In addition, it appears that covered call income plays over the next month are very attractive. We can use this target price to help set a covered call strike price level to earn more income.

PSX Stock Covered Calls are Attractive

Take a look at the call options chain from Barchart below. It shows that for call options expiring on Oct. 14, 38 days from now, the $94 strike price calls pay a premium of $2.48 to covered call investors.

PSX - Call Options expiring Oct. 14 - Barchart - as of Sept. 6, 2022

This means that if an investor were to buy 100 shares at $88.17 today for $8,817 and then sold the $94 strike call option for Oct. 14, the investor would receive $248 immediately in his account. That represents an income of 2.81% on the $8,817 cost. If that could be repeated over the next 12 months the return would be 33.7%.

But look at the $97 strike price. That represents a potential capital in the stock price of 10%, assuming the stock rises to this level by Oct. 14. The investor would immediately receive $175 for one call option contract sold on a covered call basis at the $97 strike price. This represents a monthly income of 2% (i.e., $197/$8,817 = 1.98%).

So even if the stock rises to $197 by Oct. 14, the investor would actually make a total return of $1,005 per share (i.e., $830 in capital gain and $175 in covered call income). That represents a total return of 11.4%.

Moreover, the covered call investor could potentially collect the 4.40% dividend yield over the next year as long as they sell out-of-the-money (OTM) covered calls. 

This makes PSX stock very attractive to value investors, especially those that sell OTM covered calls on a prudent basis.

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Provided Content: Content provided by Barchart. The Globe and Mail was not involved, and material was not reviewed prior to publication.