Blue Chip Stocks In Focus: Chevron
Over the past several decades, human energy consumption has grown exponentially. For this reason, it is very unsurprising that there exist many high-quality energy businesses in our blue chip stocks database.
To be a member of the Sure Dividend blue chip stocks database, a company must:
- Have a 100+ year operating history
- Pay a 3%+ dividend yield
Unlike the game of poker – where the term ‘blue chip stock’ originated from – investing in blue chip stocks is far from gambling.
In fact, the blue chip stocks list contains some of the safest, most conservative investments around. You can see the full list of blue chip stocks here.
Chevron (CVX) is one of the most notable energy blue chip stocks. The company stands out among this list of businesses because of its exceptional dividend history.
Chevron has increased its annual dividend payments for 29 consecutive years. Chevron’s dividend history is extremely rare in the energy industry, primarily because the sector is so cyclical.
Chevron and Exxon Mobil (XOM) are the only two energy companies to be Dividend Aristocrats, companies with 25+ consecutive dividend increases. You can see the list of all 51 Dividend Aristocrats here.
Chevron’s blue chip reputation, remarkable dividend history and its very high dividend yield of 4.2% are all reasons why this security appeals to investors.
This article will analyze the investment prospects of Chevron in detail.
Business Overview
Chevron is one of the international oil & gas supermajors along with:
Among this group of energy conglomerates, Chevron stands out as the company with the strongest track record of delivering market-beating total returns. In fact, Chevron leads its peer group in total return for every meaningful investment time period.
Source: Chevron 2017 Security Analyst Meeting, Corporate Overview section, slide 7
Despite Chevron’s commendable track record, 2016 was a difficult year for this company.
Over the past several years, oil prices have plunged from above $100 per barrel to ~$27 per barrel, before recovering some of that loss. This has not been easy for Chevron – the company reported a net loss of $0.5 billion in fiscal 2016.
Source: Chevron 2017 Security Analyst Meeting, Corporate Overview section, slide 4
Fortunately, Chevron has remained laser-focused on acting in the best interests of its shareholders.
The company is very shareholder-friendly, with 29 years of consecutive dividend increases and $45 billion of share repurchases in the ten-year period ending in 2014.
Source: Chevron 2017 Security Analyst Meeting, Corporate Overview section, slide 6
Chevron’s capital allocation priorities include growing its dividend without compromising the strength of its balance sheet. It is unlikely that Chevron will cut its dividend in the near future. Chevron’s operational difficulties are short-term in nature. The company is sure to realize a financial rebound when oil prices recover to more normalized levels. In the meanwhile, Chevron’s cash flow profile will improve thanks to marginal cost saving initiatives, asset sales, and reduced internal investments.
Source: Chevron 2017 Security Analyst Meeting, Corporate Overview section, slide 8
The energy sector (including Chevron) is highly out of favor right now. However, this is one of the best times to select any given investment – when the rest of the market wants nothing to do with it. Keep reading to learn why Chevron makes a buy at today’s prices.
Growth Prospects
If oil prices are so low right now, and this is hurting Chevron, then why might the company make a good investment today? Chevron is one of the safest and most well-capitalized companies in the energy sector. The only U.S.-domiciled company of similar financial strength is Exxon Mobil.
During a prolonged period of depressed commodity prices, the most conservatively-financed businesses will naturally outperform as they can take on debt to continue operating. Companies that are already highly leveraged do not have this option (at least not to the same extent as their more conservative peers).
Chevron’s impressive balance sheet means that it can actually acquire distressed energy assets as its smaller competitors go out of business. So long as Chevron’s management team can be opportunistic, there will be many bargains for them to take advantage of until oil prices recover.
Once oil prices do recover (which they almost certainly will), Chevron’s earnings and cash flow will return to more normal levels and the company will begin growing at a steady clip. Chevron’s book value per common share grew 11% per year between 2001 and 2016, which shows that this company has a proven track record of growing shareholder value.
Competitive Advantage & Recession Performance
Chevron’s largest competitive advantage comes from being one of the largest energy corporations in the world. This allows the company to tackle large projects unavailable to its smaller competitors, and (as mentioned) gives it the financial flexibility to endure through difficult operating environments.
The large players in the energy industry often work together to complete particularly large projects, sometimes with the aid of governmental authorities. As an established industry participant, Chevron has the size, relationships, and economic clout to make the most of these partnerships.
Chevron’s earnings are highly tied to the price of oil, which means that the company is certainly not the most recession-resistant Dividend Aristocrat.
For instance, consider Chevron’s fundamental performance through 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: $5.27 (54% decrease)
- 2010 adjusted earnings-per-share: $9.48 (80% increase)
- 2011 adjusted earnings-per-share: $13.44 (42% increase)
Chevron’s earnings declined an eye-popping 54% during the financial crisis but rebounded to new highs shortly afterward. Investors might wonder if Chevron’s resistance to future recessions has deteriorated because of the prolonged low oil price environment. Fortunately, this is not the case. While the percent of Chevron’s balance sheet that is financed with debt has noticeably increased in the past several years, it is still below its long-term average and below the average debt level of its peer group.
Source: Chevron 2017 Security Analyst Meeting, Corporate Overview section, slide 16
The bottom line is this: Chevron continues to be one of the largest, most-well capitalized corporations in the energy industry. This stock is one of the most conservative ways for investors to benefit from a secular rebound in the price of oil.
Valuation & Expected Total Returns
Chevron’s valuation is a bit hard to assess right now because of the company’s temporary profit drop due to low oil prices. Chevron’s current stock price is $103.05. The company’s peak level of profitability was in 2012, when it reported adjusted earnings-per-share of $13.44. Even if Chevron can return of $10/share of per-share earnings over the next several years, the company’s current stock price of $103 represents a price-to-earnings ratio of ~10.3. With $5/share of earnings, Chevron’s current price represents a multiple of 20.6. Both are lower than the average price-to-earnings ratio of the S&P 500 Index. It’s also important to compare these valuations to Chevron’s long-term historical average. (shown below)
Source: Value Line
We can use Chevron’s historical valuation and a forward earnings-per-share estimate to compute a fair value target for this stock. Chevron’s long-term average price-to-earnings ratio is 12.8. Value Line analysts expect the company to return to ~$9.75 of earnings-per-share by 2022. These figures together give a fair value estimate of $124.80, or 21% upside from the stock’s current price. It may take several years before the markets fully appreciate Chevron’s intrinsic value and drive its stock price upwards. Investors need to be patient.I believe that low oil prices are not a permanent phenomenon, but that doesn’t mean they will disappear tomorrow, either.
Buying Chevron now allows investors to participate in the upside of rising oil prices without taking undue risk (because of Chevron’s size and financial strength). Until Chevron’s earnings growth resumes, investors can happily collect the company’s juicy 4.2% dividend yield – more than double the yield of the S&P 500 Index. Importantly, Chevron’s dividend is very safe.
Chevron generated cash from operations of $12.8 billion in the most recent quarter and paid $8.0 billion in dividends. While capex and operating expenses certainly use some of Chevron’s $12.8 billion in operating cash flow, it is promising to see the company’s strong cash generation capabilities.
Another way (other than earnings or cash from operations) to assess Chevron’s ability to continue paying its dividend is use the Value Line ‘cash flow per share’ metric, which is calculated as: the sum of reported earnings plus depreciation and amortization, less any preferred dividends & stock option expenses, calculated on a per-share basis. A comparison of Chevron’s dividend payments and cash flow per share can be seen below.
Source: Value Line
Chevron has consistently generated more than twice the cash flow (as defined previously) necessary to fund its dividend. Accordingly, I view Chevron’s dividend as very safe (at least among its peers in the energy industry). To conclude, Chevron has a very attractive total return profile if oil prices move upwards to a more typical level. We view oil price mean reversion as highly likely, and Chevron provides the financial strength to continue operations if this prediction takes some time to materialize.
Final Thoughts
Chevron is a classic example of a fantastic business experiencing temporary difficulties. What does this mean for common stock investors?
I’ll leave that to Warren Buffett:
“The best thing that happens to us is when a great company gets into temporary trouble…We want to buy them when they’re on the operating table.”
Along with Exxon Mobil, Chevron remains one of the best options for investors to benefit from a rebound in oil prices thanks to its robust balance sheet, dividend safety, and leading size as one of the 6 supermajors.
Disclosure: Sure Dividend is published as an information service. It includes opinions as to buying, selling and holding various stocks and other securities.
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