ConocoPhillips (COP) could raise its dividend per share at the end of April or early May. With a 10% hike, the stock's dividend yield could rise from 3.3% today to over 3.6%. That is well over its historical dividend yield average, making COP stock a favorite of value investors.

COP is trading at $94.32 today, well off its recent high point of $105.85 on January 17. Given its annual dividend per share (DPS) of $3.12, COP now has a dividend yield of 3.3%.

But ConocoPhillips has historically raised its dividend after four quarterly payments. The company recently made the fourth of four quarterly 78-cent DPS payments (i.e., $3.12 annually). So, it is due to potentially announce a dividend increase.

Ordinary Dividends, Variable Return of Cash and Buybacks

Last year on May 2, the company announced a 25.6% increase in its quarterly DPS from 58 cents to 78 cents. This 20-cent increase was due to a “Variable Return of Cash” (VROC) payment on top of the “ordinary” quarterly dividend of 58 cents.

Note that there was no guarantee that the company's VROC in the future would be greater than 20 cents over the ordinary DPS. However, since then, the company upgraded its dividend payment. 

On May 29, 2024, after announcing the Marathon Oil Corporation acquisition in an all-stock transaction (which it later closed on Nov. 22, 2024), ConocoPhillips said it would increase its ordinary dividend base to 78 cents. There was no longer any discussion of a VROC payment on top of this ordinary DPS payment.

In addition, the company said it would begin a massive share buyback program to pay for the Marathon transaction's share dilution. It said during the first year, there would be $7 billion in share repurchases (up from $5 billion), as well as $20 billion over three years. That implies $7 billion in buybacks in the remaining two years.

The point is that the company's cash flow would likely cover these payments as well as the dividend payments.

Why ConocoPhillips May Hike Its Dividend

So, why do I expect a dividend increase?  One reason is that typically companies want to show progress with their dividend increases. For example, ConocoPhillips has had 8 consecutive years of dividend per share increases. It may want to keep this track record going.

In addition, the company may want to reward its new Marathon shareholders with a stable, regular dividend per share increase. Third, the company can seem to afford this increase. 

For example, in 2024, the company generated $20.1 billion in cash flow from operations (CFO), but its dividend cost just $3.646 billion. Even after $12.1 billion in capex spending the company had free cash flow (FCF) of $8billion available for both DPS and buyback payments.

That leaves plenty of room for at least a 10% increase in its dividend at the end of April or early May.

Dividend Yield Target Price

That leaves the stock potentially undervalued. For example, if we assume that the dividend per share (DPS) rises 10% to $3.44, the forward dividend yield at today's price is 3.65%:

   $3.12 x 1.10 = $3.44 DPS

   $3.44 / $94.32 = 0.03647 = 3.65%

This is well over the stock's historical dividend yield average. For example, Morningstar reports that its five-year average yield has been 2.36%. And Seeking Alpha's 5-year average yield is 2.68%.

So, to be conservative, if we assume that at some point COP stock reaches at least a 3.0% dividend yield, COP could rise at least 21.6%. Here is how that works out:

   $3.44 DPS / 0.03 = $114.67 price target

   $114.67 / $94.32 price today = 1.216 = +21.6% upside

Analysts tend to agree with this higher price target. For example, the average of 30 analysts surveyed by Yahoo! Finance shows an average price target of $129.52. Similarly, the mean survey from Barchart is $130.50 per share.

AnaChart.com, which surveys recent analyst recommendations, shows that the average price target of 19 analysts is $119.91. That is still 27% higher than today's price. 

The bottom line is that COP looks very undervalued here. However, there is no time frame when these price targets could be reached. 

One play here is to set a lower price target and get paid while waiting. To do this, an investor can sell short out-of-the-money (OTM) put options in nearby expiry periods.

Shorting OTM Puts

For example, look at the April 11, 2025, expiration period. It shows that the $90.00 strike price put options have a $2.03 midpoint premium.

That means that a short-seller of these puts can make an immediate yield of 2.256% (i.e., $2.03/$90.00 = 0.02255) over the next month.

This strike price is 4.7% below today's price and is well out-of-the-money (OTM). That way the investor can set a lower potential buy-in point and still get paid very well waiting for the stock to fall to this price.

Note that there are significant risks associated with short-put plays. Investors can go to Barchart's Options Learnings Center to analyze these risks. 

For example, you can end up with an unrealized capital loss, if, for example, COP stock falls below $90.00 on or before April 11. In that case, the investor's collateral (in this case, $9,000 per put contract) will be assigned to buy 100 shares at $90.00.

But at least, in that case, the breakeven point is $90.00 - $2.03, or $87.97 per share. That is 6.7% below today's price, so it sets a good buy-in point for the short-put investor.

The bottom line is that COP stock looks undervalued here, especially if ConocoPhillips hikes its dividend next month, as expected.

On the date of publication, Mark R. Hake, CFA did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.