Chevron's Massive Free Cash Flow Powers the Stock Higher

Chevron (CVX) produced massive free cash flow (FCF) in Q3, as reported on Friday, Oct. 28. This is pushing its stock higher. Given its large stock buybacks, an expected dividend hike, and steady profits, CVX stock could still be a bargain.

The stock is now at $182.93 up 22% in the last month as investors began to expect good results. Moreover, there is every reason to believe that its massive FCF can continue to push the stock higher.

During Q3 Chevron generated $15.3 billion in cash flow from operations (CFFO), and after capital spending, its free cash flow was $12.3 billion. This means that cash flow is “free” to be spent on shareholders or for debt reduction, acquisitions, or cash accumulation. 

For example, the company spent $2.7 billion on dividends and $3.75 billion on share repurchases, buying back 1% of the company's stock. That amounts to $6.45 billion in total spent on shareholders. That still leaves $5.85 billion from the FCF generated which it has available for other uses.

Moreover, on an annualized basis, this FCF works out to $49.2 billion, which works out to 14% of its $352 billion market value. That is an extraordinarily high FCF yield compared to most stocks. 

Where This Leaves Investors In CVX Stock

So far this year CVX stock has risen over 53%, but it may have more to go. For one, the company is likely to raise its dividend at the next quarterly announcement. That is because it has now paid the same quarterly dividend of $1.42 for the past 4 quarters. or $5.68 annually. Chevron has hiked its dividend annually for the past 34 years.

Right now CVX stock has a 3.1% dividend yield. If the company raises its dividend by 10%, that raises the yield to 3.4%. 

In addition, if the company keeps buying back 1% of its shares outstanding, that gives it a 4% buyback yield. Altogether then, the total yield to shareholders is 7.4% or $13.51 per share, including the dividend yield. This is a very high total yield.

For example, if the stock were to rise to the point where the total yield is 5%, the stock could rise to $270 per share. This can be seen by dividing $13.51 by 5%. That represents a potential rise of 47% in CVX stock from here.

The bottom line here is that as long as the price of oil and gas stays strong, expect to see Chevron stock continue to do well.

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