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

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.

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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