Updated on February 9th, 2021 by Eli Inkrot
Chevron Corporation (CVX) is one of the largest and most well-known oil stocks in the world. It is also one of the most stable, having increased its dividend for 33 consecutive years.
As a result, Chevron is a member of the exclusive Dividend Aristocrats – a group of 65 elite dividend stocks with 25+ years of consecutive dividend increases.
We believe the Dividend Aristocrats are some of the highest-quality dividend stocks in the entire stock market. With this in mind, we created a full list of all 65 Dividend Aristocrats, along with important financial metrics such as dividend yields and P/E ratios.
You can download a copy of our full Dividend Aristocrats list by clicking on the link below:
Due to the industry’s reliance on high commodity prices for profitability, there are just two energy stocks on the list of Dividend Aristocrats – Chevron and Exxon Mobil (XOM). Chevron’s dividend consistency and stability help it to stand out in the otherwise-volatile energy industry.
This article will analyze the intermediate-term investment prospects of Chevron.
Chevron is one of 6 oil and gas supermajors, along with:
- BP (BP)
- Eni SpA (E)
- Total SA (TOT)
- Exxon Mobil (XOM)
- Royal Dutch Shell (RDS-B)
Chevron is one of only two oil and gas supermajors to be headquartered in the United States, along with fellow Dividend Aristocrat Exxon Mobil. Like the other integrated supermajors, Chevron engages in upstream oil and gas production, as well as downstream refining businesses.
After a difficult period for the oil and gas supermajors from 2014-2016, when oil prices sank from over $100 per barrel to under $30 per barrel, the industry had enjoyed a recovery until the COVID-19 pandemic, which significantly reduced energy demand and prices.
Chevron posted a loss in 2016 and posted adjusted earnings-per-share of $3.79, $7.74 and $1.54 in 2017 through 2019. These numbers are still well below the company’s peak ($13.44 in 2011). Furthermore, in 2020 Chevron posted a loss of -$2.96 per share. While the downstream segment made a small profit in 2020, it was not enough to buoy company-wide results. The pandemic has significantly impacted the business and indeed will likely continue to weigh on results for 2021.
Notably, Chevron is still maintaining its dividend, having recently declared a $1.29 quarterly payment – the fifth straight payout at this rate.
To normalize results and calculate valuation, we are using the company’s mid-cycle earnings (4-year average pre-2020) of $4.36 per share as a starting point.
Chevron is one of the largest publicly traded energy corporations in the world and stands to benefit tremendously from a rebound in energy prices and a recovery from the pandemic.
Despite short-term demand concerns, the long-term trend of needing more energy in the future is still very much alive. Furthermore, there is a large gap between the existing supply and what will be required, creating the opportunity for continued investments over time.
Chevron invested heavily in growth projects for years but failed to grow its output for an entire decade, as oil projects take several years to start bearing fruit. However, Chevron is now in the positive phase of its investing cycle.
Chevron grew its output by 5% in 2017, 7% in 2018 and 4% in 2019 and was expected to grow its output by 3%-4% per year until 2024 but the pandemic has disrupted its growth trajectory for 2020.
We expect the pandemic to subside and Chevron to return to growth mode thanks to its sustained growth in the Permian Basin and in Australia. Chevron has more than doubled the value of its assets in the Permian in the last two years thanks to new discoveries and technological advances.
Chevron also learned its lesson from the previous downturn and now invests most of its funds on projects that begin delivering cash flows within two years.
We expect the oil major to grow its earnings-per-share by 12% per year on average over the next five years off its mid-cycle level (4-year average) of $4.36.
Furthermore, the dividend should continue to grow as well, as the company continues its 30+ year streak of higher payouts. This does not necessarily mean that investors will receive a dividend boost each and every four quarters. There have been numerous instances when Chevron held the dividend steady for more than four quarters – with the current period being a prime example – and eventually increased it such that the year-over-year comparison showed improvement.
The important thing to note is that Chevron is committed to the payout in all environments.
Despite the difficult operating environment, Chevron is committing to preserving long-term value through investments and reserve replacement.
Source: Chevron Q4 2020 Earnings Call
Competitive Advantages & Recession Performance
Chevron’s competitive advantage in the highly cyclical energy sector comes primarily from its size and financial strength. The company’s operational expertise allowed it to successfully navigate 2014-2016, one of the worst oil bear markets on record, as well as the 2020 coronavirus pandemic.
As a commodity producer, Chevron is vulnerable to any downturn in the price of oil, particularly given that it is the most leveraged oil major to the oil price. In addition, the oil major currently has an unsustainable payout ratio due to the impact of the pandemic on its business. However, we expect the pandemic to subside from next year and the payout ratio to become sustainable again in the upcoming years.
Chevron’s aggressive cost-cutting efforts have helped the company become more efficient. Chevron has continued to reduce drilling costs, significantly reducing its break-even expense.
In fact, today Chevron claims to be the best-positioned for commodity price uncertainty, as it boasts one of the lowest cash flow break-even prices among its major oil counterparts.
Chevron stacks up well among its peers in the energy sector. However, the company is certainly not the most recession-resistant Dividend Aristocrat, as evidenced by its performance during the 2007-2009 financial crisis:
- 2007 adjusted earnings-per-share: $8.77
- 2008 adjusted earnings-per-share: $11.67 (33% increase)
- 2009 adjusted earnings-per-share: $5.24 (-55% decline)
- 2010 adjusted earnings-per-share: $9.48 (81% increase)
Chevron’s adjusted earnings-per-share declined by more than -50% during the 2007-2009 financial crisis, but the company did manage to remain profitable during a bear market that drove many of its competitors out of business. This allowed Chevron to continue raising its dividend payment each year of the Great Recession and indeed for the last 3 decades. Chevron’s dividend safety is far above the average company in the energy industry.
The COVID-19 pandemic and resultant slump in energy prices will be another challenge, but so far Chevron is proving resilient once again.
Valuation & Expected Total Returns
Chevron’s expected total returns are more difficult to assess than many other companies. This is primarily due to the fact that the company’s earnings can be quite volatile.
With a share price near $89, the price-to-earnings ratio presently sits at 20.4 times based on mid-cycle earnings power of $4.36 per share. If the stock were to revert to our fair value estimate of 14 times earnings, this would imply a -7% to -8% annualized valuation headwind.
However, this is made up for with the outsized expected EPS growth rate, as the company’s earnings are coming off a reduced base. We are forecasting 12% annual EPS growth from $4.36 per share to $7.69 per share after five years (still well below levels reached earlier in the decade). When combined with the 5.8% starting yield and valuation impact, this implies the possibility for 8% to 9% total expected returns per year over the next five years.
Chevron is one of the rare oil and gas companies that was able to navigate through the Great Recession of 2007-2009, the oil downturn of 2014-2016, and so far, the COVID-19 pandemic without cutting its dividend.
It has even managed to grow its dividend lately, including a 3.7% increase in 2018, a 6.3% increase in 2019 and an 8.4% increase in 2020. As a result of Chevron’s lower cost structure, it can now handle a much lower average price of oil. Furthermore, new projects in the U.S. and international markets will help the company continue to grow.
While Chevron’s valuation does not appear overly compelling, the “snap back” effect as it relates to energy demand appears to be gaining traction. Shares could offer high single-digit returns at the current price level, driven by a recovery towards a normal economy and the 5.8% dividend yield.