Published on June 26th, 2022 by Quinn Mohammed
Berkshire Hathaway (BRK.B) has an equity investment portfolio worth over $360 billion, as of the end of the 2022 first quarter.
Berkshire Hathaway’s portfolio is filled with quality stocks. You can follow Warren Buffett stocks to find picks for your portfolio. That’s because Buffett (and other institutional investors) are required to periodically show their holdings in a 13F Filing.
You can see all Warren Buffett stocks (along with relevant financial metrics like dividend yields and price-to-earnings ratios) by clicking on the link below:
Note: 13F filing performance is different than fund performance. See how we calculate 13F filing performance here.
As of March 31st, 2022, Buffett’s Berkshire Hathaway owned just over 159 million shares of the Chevron Corporation (CVX) for a market value of nearly $26 billion. Chevron Corp. represents about 7.1% of Berkshire Hathaway’s investment portfolio. This makes it the 4th largest position in the portfolio, out of 49 stocks.
This article will analyze the oil & gas company in greater detail.
Chevron is the third-largest oil major in the world based on its market cap of $277 billion, behind only Saudi Aramco and ExxonMobil (XOM).
Like the other integrated supermajors, Chevron engages in upstream oil and gas production, as well as downstream refining businesses.
Chevron is regarded as a more levered play on the price of oil than other oil majors.
In 2021, Chevron generated 84% of its earnings from its upstream segment. While close industry peers BP and Total produce crude oil and natural gas at roughly equal ratios and Exxon has a 60/40 production ratio, Chevron is more leveraged to the price of oil with its 61/39 production ratio.
Chevron reported financial results on April 29th for the first quarter of fiscal 2022. The company increased U.S. oil and gas production by 10% over the first quarter of 2021. At the same time, its international production decreased by 8%. Total net oil-equivalent production worldwide was down 2%.
Despite reduced total production, Chevron benefited greatly from the rally of oil and gas prices to 13-year highs, which are primarily a result of sanctions of western countries on Russia for its invasion in Ukraine.
As a result, the oil major grew its adjusted earnings-per-share 31% sequentially, from $2.56 to $3.36, a nearly all-time high. And, adjusted earnings are up massively in comparison to a year ago, when Chevron posted $0.90 per share.
We expect the continuation of sanctions will keep oil and gas prices high this year and forecast Chevron will post earnings-per-share of $16.40.
Chevron is one of the largest publicly traded energy corporations in the world and has benefited tremendously from a rebound in energy prices.
Source: Investor Presentation
Even with the incredible rally in oil prices, the long-term demand for energy is still intact. Furthermore, there is a 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 begin yielding results. However, Chevron is now in the positive phase of its investing cycle.
The corporation has more than doubled the value of its assets in the Permian in the last three years as a result of new discoveries and technological advances.
Chevron also became wearier and more cautious following the previous downturn, now choosing to invest most of its funds on projects which deliver cash flows within two years.
However, we expect the oil major to have its earnings-per-share decrease by 10% annually over the next five years off its forecasted cyclical high of $16.40 this year.
Still, the dividend should continue to grow, as the company continues on its 35-year streak of increasing payouts. Chevron is committed to the payout in all environments.
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 the 2020 coronavirus pandemic with its dividend growth streak intact.
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. Following an unsustainable payout ratio in 2020 and 2015-2016, the company appears to be on much better footing now in 2022. Based on our earnings estimate for this year, and the annual dividend of $5.68, Chevron can be expected to have a payout ratio of 35%.
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.
Chevron compares favorably to its peers in the energy sector. However, the company is not the most recession-resistant Dividend Aristocrat, which can be seen by observing its performance during the great 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 competitors out of business. This allowed Chevron to continue raising its dividend payment each year for the last three decades, even through the Great Recession, and the COVID-19 pandemic. Chevron’s dividend safety is far above the average company in the energy industry.
Valuation & Expected Returns
In the 2012 through 2021 stretch, shares of Chevron traded with an average price-to-earnings multiple between 8- and 40-times earnings. Shares are now trading at the lower end of their historical average range, at 9.4 times earnings. As a result, we believe there is a potential for a valuation tailwind in the intermediate term.
Our fair value estimate for Chevron stock is 14.0 times earnings. If this proves correct, the stock will benefit from a 6.7% annualized gain in its returns through 2027.
Shares of Chevron currently yield 3.7%, which is lower than its ten-year average yield of 4.2%. Due to the run up in the stock price, the company now has a lower-than-average dividend yield. On a dividend yield basis, Chevron shares seem to be overvalued.
Given the intense cyclicality of the oil industry, and the blowout earnings forecasted in 2022, we expect a -10% average annual decrease of earnings per-share over the next five years. Putting it all together, the combination of valuation changes, EPS growth, and dividends produces total expected returns of 1.3% per year over the next five years. This makes Chevron a sell.
Chevron is one of the rare oil and gas companies that was able to navigate through the Great Recession, the oil downturn, and the COVID-19 pandemic without cutting its dividend.
The company latest dividend increase took place in the fourth quarter of 2021, where Chevron increased the annual dividend by 6.0% to $5.68. 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 appears to be undervalued today on a price-to-earnings basis, the company may be overvalued on a dividend yield basis. Still, an anticipated reduction in earnings growth off this year’s cyclical high will reduce total estimated returns over the intermediate term. As a result, shares of Chevron don’t appear overly appealing today.
Other Dividend Lists
Value investing is a valuable process to combine with dividend investing. The following lists contain many more high-quality dividend stocks:
- The Dividend Aristocrats List is comprised of 65 stocks in the S&P 500 Index with 25+ years of consecutive dividend increases.
- The High Yield Dividend Aristocrats List is comprised of the 20 Dividend Aristocrats with the highest current yields.
- The Dividend Achievers List is comprised of ~350 stocks with 10+ years of consecutive dividend increases.
- The Dividend Kings List is even more exclusive than the Dividend Aristocrats. It is comprised of 44 stocks with 50+ years of consecutive dividend increases.
- The High Yield Dividend Kings List is comprised of the 20 Dividend Kings with the highest current yields.
- The Blue Chip Stocks List: stocks that qualify as Dividend Achievers, Dividend Aristocrats, and/or Dividend Kings
- The High Dividend Stocks List: stocks that appeal to investors interested in the highest yields of 5% or more.
- The Monthly Dividend Stocks List: stocks that pay dividends every month, for 12 dividend payments per year.
- The Dividend Champions List: stocks that have increased their dividends for 25+ consecutive years.
Note: Not all Dividend Champions are Dividend Aristocrats because Dividend Aristocrats have additional requirements like being in The S&P 500.
- The Dividend Contenders List: 10-24 consecutive years of dividend increases.
- The Dividend Challengers List: 5-9 consecutive years of dividend increases.