You’ll Be Laughing All The Way To The Bank With Chevron’s 6% Yield (NYSE:CVX)

Written by Robert Kovacs

Introduction

Chevron (CVX) is one of my favorite oil stocks, and the only one I’m doubling down on now. Three months ago, in May, I suggested that investors “just buy Chevron’s 5.7% yield and forget about it”.

Unsurprisingly, energy stocks have received no love since then, with much uncertainty remaining about how the Covid-19 pandemic is going to play out.

Source: Open Domain

CVX has declined by 8% since my previous article. The stock is currently trading at $85.08 and yields 6.06%. Our MAD Scores give CVX a Dividend Strength score of 89 and a Stock Strength score of 57.

Source: mad-dividends.com

Up until 2 months ago, Chevron had held up somewhat better than its peers. The price was even up about 8% from my last article at one point. But that wouldn’t last.

Chevron’s momentum has now soured, and is in line with that of the entire energy sector, despite being a clearly superior stock.

For me this spells opportunity. After reviewing briefly last quarter’s key events, I will bring you through my analysis of CVX’s dividend strength, its stock profile, before concluding.

I’m breaking my rules and buying more CVX.

What happened last quarter?

Chevron had a bad quarter. It missed significantly on both top line and bottom line, as volumes declined significantly. Revenue was only 45% of the level realized last quarter. Of course, this isn’t great. CVX was hit by low demand and low oil prices. This is probably going to be the worst quarter for Chevron, as the company used it to have what seems like a big bath, in which the company impaired various properties by $5.6bn.

During the quarter, Chevron’s cash position reduced by $1.7bn as asset sales and an increase in debt weren’t enough to cover Capex and dividends.

Source: Q2 Earnings Presentation

Yet there is still no reason to be worried. The chart on the right of the slide above, shows that CVX’s net debt ratio remains significantly below the range of its key competitors.

Chevron has the capacity to take on more debt without significantly weakening the business. During the first quarter earnings, management shared its stress test at $30 Brent for all of 2020 and 2021, in which it was clear that the company would be able to cover its capex, dividend and financing of Tengizchevroil.

Source: Q1 Earnings Presentation

With Brent back at $45, things could be significantly better than this worst case scenario which was presented.

Chevron has also been on an acquisition spree, using its superior financial position to snap up assets at good prices. It first acquired Australia Puma Energy for $300mn, then announced a stock deal to acquire Noble Energy for $5bn, adding 18% to Chevron’s proved oil and gas reserves.

Financial discipline pays off long term, by providing Chevron the opportunity to purchase quality assets at attractive prices during challenging times.

Dividend Strength

A bad quarter shouldn’t phase the dividend profile of an All Weather dividend stock. Within a sector as cyclical as energy, short term, the dividend coverage metrics can look quite bad.

Dividend Safety

Chevron’s earnings have been negative for the past 12 months.

The dividend over the past 12 month still only represents 50% of its operating cashflow. Of course the past quarter operating cashflow of $100mn isn’t going to cut it, but it would be shortsighted to believe that such bad performance will last for more than a few quarters.

CVX pays 193% of its free cashflow as a dividend, which is better than 8% of dividend stocks.

30/06/2016

30/06/2017

30/06/2018

30/06/2019

30/06/2020

Dividends

$4.2800

$4.3100

$4.4000

$4.6200

$4.9600

Net Income

$-0.39

$3.08

$6.35

$7.72

$-4.63

Payout Ratio

-1098%

140%

70%

60%

-108%

Cash From Operations

$7.25

$9.55

$12.24

$17.11

$9.86

Payout Ratio

59%

46%

36%

27%

51%

Free Cash Flow

$-5.76

$1.75

$5.12

$9.27

$2.56

Payout Ratio

-75%

245%

86%

50%

193%

Source: mad-dividends.com

The numbers are not great, and significantly worse than they have been in previous years. The year leading up to June 2016 was at least as bad as this one is going to be, when Brent dropped to $27.

But then it recovered, and one thing I have no doubt of, is that the economy will recover, and our system will prevail. When that happens, Brent will pop back up, and Chevron will once again generate enough of cash to cover the dividend.

In the meantime, the company has the privilege of a superior balance sheet to take on necessary debt to continue its dividend policy. Management recognizes the importance of a strong dividend policy for oil companies, and has reinstated its commitment to paying the dividend in the last earnings call: “Our financial priorities remain unchanged. We’re on track to grow the dividend for the 33rd straight year.”

Chevron has been through many recessions, and this hasn’t stopped it from coming out stronger, and raising the dividends it pays for over 3 decades. Rest assured, your dividend isn’t going anywhere.

Dividend Potential

Chevron Corporation has a dividend yield of 6.06% which is better than 84% of dividend stocks. For Chevron, this yield is highly unusual. For the past decade, it has yielded a median 3.7%. In only 1.3% of trading days over the period, has Chevron yielded more than it currently does.

Source: mad-dividends.com

Maybe the days of a 3.5% yielding Chevron are behind us, but there is no reason to reasonably believe that within a couple years, Chevron won’t be yielding 4% to 4.5% again.

Could the price go lower, pushing the yield higher? Sure, I believe the maximum yield of 9.5% it reached in March is proof that prices can always go down more.

The point is, 6% is an extremely high yield for a stock like Chevron.

The dividend grew 8% during the last 12 months which is higher than the company’s 5 year average dividend growth of 4%. I don’t believe this year growth will be anything like this. In fact I wouldn’t be surprised to see a dividend hike as low as $0.01 per share per quarter this year.

Source: mad-dividends.com

Oil companies have struggled, and revenues have never returned to where they were in the first half of the previous decade, and likely never will. This doesn’t mean there isn’t a sweet spot in which they can still remain profitable, as Chevron showed in 2017, 2018, and 2019.

Source: mad-dividends.com

Yet at a 6% yield, you really don’t need that much dividend growth to have a great investment.

A $10,000 investment in Chevron now will grow to a nice stream of dividends. Assuming a 6% yield and 3% dividend growth, one could assume $811 per year in dividends 10 years from now, or $1,367 if dividends are reinvested at the same rate once per year.

Source: mad-dividends.com

High yielding dividend stocks can really fuel your income, and any growth just compounds the effect of reinvesting that high quarterly dividend.

Dividend Summary

CVX has a dividend strength score of 89 / 100. Chevron’s management remains committed to its dividend. The stock’s high quality means the company can find other sources of cash while business is rough. It also means the company is picking up high quality assets at low prices, which will mean the company will come out on the other side bigger, leaner and stronger than ever.

For dividend investors, this sort of proposition should be too good to turn down.

Stock Strength

It is quite normal that some skepticism will arise when singing praises of a stock which is down 30% while the S&P 500 (SPY) has increased 4.5%. In many ways, Chevron is a contrarian bet. This market has become extremely polarized, with some stocks rising to new heights while others are left for dead. Let’s bring some rationale analysis back here, and look at the 3 fundamental factors of Chevron.

Beware! Nothing indicates that Chevron’s price is going to revert to mean multiples anytime soon, its momentum in fact suggests the opposite.

Value

  • CVX has a negative P/E
  • P/S of 1.34x
  • P/CFO of 8.63x
  • Dividend yield of 6.06%
  • Buyback yield of 2.61%
  • Shareholder yield of 8.68%.

According to these values, CVX is more undervalued than 72% of stocks, which is interesting for a few reasons. First in our scoring system, having negative earnings will take a significant hit at the value score. Next, Chevron generated nearly no cash from operations this quarter, yet its multiple of operating cash remains reasonable for a company of Chevron’s caliber.

While the buybacks will likely be lower for a while, Chevron has a shareholder yield, which, thanks to its large dividend, just can’t be ignored.

What the data suggests, is that despite the extremely bad results it has delivered, it still looks quite cheap relative to most stocks. This is saying something. The interest in energy has gone away, but the need for oil hasn’t gone anywhere post pandemic. When the time comes, patient investors in Chevron stock will likely see valuation reverting to the mean, and the price increasing significantly. I think a 2-3 year price target 25-30% higher than the current price wouldn’t at all be unreasonable.

Value Score: 72 / 100

Momentum

Chevron Corporation trades at $85.08 and is down -7.56% these last 3 months, -21.95% these last 6 months & -27.82% these last 12 months.

Source: mad-dividends.com

This gives it better momentum than 18% of stocks, which is worrying. The index has totally killed Chevron this year, and with such bad momentum, there is little reason to believe this will change, until a new appreciation of Energy stocks emerges, which won’t happen until some significant positive pandemic related news happens.

If you decide to invest in Chevron, you should do so because of the long term exposure to the dividend and the belief that within a couple of years, there will be significant improvements in global outlook.

If you’re looking for a quick buck, you might want to look elsewhere. I have investing rules which says I don’t invest in stocks which have a momentum score of less than 30 / 100. These stocks have historically been the worst performers in the next 3, 6 and 12 months.

My only exception is for All Weather dividend stocks when they are trading at obviously depreciated valuations. Going against this rule only happens when I’m significantly at odds with the market, and strongly convinced the market is wrong and I’m right.

Momentum score: 18 / 100

Quality

CVX has a very low gearing ratio of 0.7, which is better than 74% of stocks. The company’s liabilities have decreased by -10% over the course of the last 12 months. The company’s operating cashflow can cover an impressive 20.5% of liabilities. Each dollar of assets generates $0.5 in revenue, which is a higher amount than 52% of stocks. It depreciates 248.3% of it’s capital expenditure each year, which is better than 76% of stocks. CVX has a Total Accruals to Assets ratio of -16.8%, which is better than 72% of companies. This makes CVX’s quality better than 71% of stocks. All of CVX’s quality profile is satisfying. In normal times, high returns on equity and good interest coverage ratios make the score even higher. However, negative earnings bring the score lower down, reflecting current pressure on top and bottom line.

But what these numbers suggest is that Chevron is not only of higher quality relative to its sector, but relative to all US stocks. It is in every sense, an all weather stock, thanks to its scale, and superior financial position.

Quality Score: 71 / 100

Stock Strength Summary

When combining the different factors of the stocks profile, we get a stock strength score of 57 / 100 which suggests that outperformance isn’t extremely likely. In fact I expect Chevron to remain in limbo between $80 and $90 until the market changes its opinion on the economy. This likely won’t happen straight away. Your CVX investment will likely be dead money for a while.

Conclusion

With a dividend strength score of 89 & a stock strength of 57, Chevron will seem like a great investment at these prices in a few years, I have no doubt about this. Locking in such a great yield means that the market doesn’t need to agree with us, as long as management remains its unwavering commitment to the dividend.

Chevron is the only energy stock I’m buying more of right now. Its position in the All Weather dividend portfolio will also be increased at the end of the month.

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Disclosure: I am/we are long CVX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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