Energy companies are highly cyclical. Their profits expand during periods of economic expansion and contract swiftly during downturns. After reporting record profits in 2022, energy stocks saw a steep fall in valuations last year due to macro headwinds combined with a worldwide shift towards clean energy. However, several energy stocks now have elevated dividend yields. For instance, Chevron (NYSE:CVX) stock currently trades 21% below all-time highs and offers shareholders a dividend yield of 4.2%.
This makes CVX stock an attractive option for dividend investors, so let’s see if you should buy Chevron stock solely for its relatively high dividend yield.
Investors should understand that not every dividend-paying stock is a good investment. It’s essential to analyze the company’s fundamentals, such as its payout ratio, balance sheet debt, pricing power, and cash flows, to see if it can maintain and grow these payouts over time. Nevertheless, I am bullish on Chevron due to its wide competitive moat, predictable stream of cash flows, and sustainable payout ratio.
An Overview of Chevron
Chevron is engaged in integrated energy and chemicals operations in the U.S. and other international markets. It has two primary business segments, which include the following:
Upstream: It explores, develops, produces, and transports crude oil and natural gas.
Downstream: It refines crude oil into petroleum products and markets crude oil, refined products, and lubricants.
Chevron has large-scale operations in some of the world’s most important oil and gas regions. Its upstream portfolio is anchored by key assets, including oil in Kazakhstan, LNG in Australia, shale in the U.S. and Argentina, deep-water assets in the Americas, and natural gas in the Eastern Mediterranean region.
With a market cap of $274 billion and an enterprise value of around $290 billion, Chevron is a global energy giant.
How Did Chevron Perform in Q3 2023?
In Q3 2023, Chevron reported adjusted earnings of $5.7 billion or $3.05 per share, compared to earnings of $10.8 billion or $5.56 per share in the year-ago period. Lower oil prices resulted in a decline in upstream realizations and lower margins on refined product sales for Chevron in the September quarter.
Chevron’s sales in Q3 stood at $51.9 billion, down from $63.5 billion in the prior year quarter due to lower commodity prices.
Despite a challenging and uncertain macro environment, Chevron increased its capital expenditures by over 50% to $4.7 billion in Q3. It includes the $400 million the company spent on acquiring a majority stake in ACES Delta.
Chevron Acquires Hess for $53 Billion
Late last year, Chevron announced plans to acquire Hess (NYSE:HES) for a whopping $53 billion. Hess is a premier exploration and production company with ownership of long-life growth assets in Guyana.
Chevron expects the transaction to become accretive to cash flow per share in 2025 after achieving synergies and the launch of the fourth FPSO (floating production, storage, and offloading) vessel in Guyana.
According to Chevron, the Stabroek Block in Guyana has over 11 billion BOE (barrels of oil equivalent) of gross discovered recoverable resources. The net production for Hess in the basin is about 110,000 barrels per day from just two FPSOs. Hess is developing three more FPSOs, which should double its production capacity.
Chevron emphasized that it has identified $1 billion of run-rate cost synergies related to Hess, which should be realized within a year of closing. Moreover, the acquisition should increase production and free cash flow growth rates in the next five years, supporting dividend hikes and buybacks.
These low-premium deals have diversified Chevron’s upstream business. After accounting for free cash flows from investments in TCO, Permian, and the Gulf of Mexico, the company expects free cash flow to more than double by 2027.
Armed with a robust portfolio of cash-generating assets, Chevron emphasized that it would generate between $10 billion and $15 billion from asset sales through 2028.
A Dividend Aristocrat
Chevron has hiked dividends for 36 consecutive years, showcasing the resiliency of its cash flows and earning it the title of “Dividend Aristocrat.” Chevron’s payouts have risen by 6.6% annually in this period, enhancing the effective yield significantly.
In Q3 2023, Chevron reported a free cash flow of $5 billion, lower than its cash flows of over $12 billion during the same period in 2022. Given that it paid shareholders dividends of $2.9 billion, the company’s payout ratio is below 50%, providing Chevron with the flexibility to reduce balance sheet debt and target accretive acquisitions.
Chevron expects to raise quarterly dividends by 8% year-over-year to $1.63 per share in 2024. It also plans to allocate $20 billion in buybacks, reducing the total share count by 7% and boosting earnings per share in the process.
Is CVX Stock a Buy, According to Analysts?
Out of the 19 analysts covering CVX stock, 14 recommend a Buy, five recommend a Hold, and none recommend a Sell, giving it a Moderate Buy consensus rating. The average CVX stock price target is 179.28, 23.4% above the current price.
Priced at 10.8x forward earnings, CVX stock is not too expensive, given its tasty dividend yield and potential for consistent dividend hikes. The peer median forward price-to-earnings ratio is about 10x.
The Key Takeaway
Chevron is a blue-chip energy stock that has survived multiple economic recessions and maintained its dividend yield. The company can still cover its capital expenditures and dividend payout even if oil prices fall by 35% from current levels ($50/barrel Brent crude oil), according to the company, providing it with a substantial margin of error.
Moreover, with less than $15 billion in adjusted debt (total debt minus cash, cash equivalents, and marketable securities), Chevron can easily raise funds to fuel its acquisition of Hess, making it an enticing investment choice for those looking for regular dividend income.
