Chevron Corporation is an enormous oil and natural gas explorer, producer, and refiner. The firm is in the Dow Jones Industrial Averages (DJIA). Also, it is a part of the Dividend Champions and Dividend Aristocrats because of its 36-year streak of dividend increases. Chevron is doing well because of relatively high oil prices. Although prices have declined from their peak, Chevron will likely have another solid year in 2023. We view Chevron (CVX) as a long-term buy at the correct valuation because of its dividend safety and market leadership.

Overview of Chevron

Chevron Corporation (CVX) was founded over 140 years ago in 1879. The giant oil company has become an immense integrated oil and gas major. Today, the firm operates globally in two segments: Upstream and Downstream. The Upstream segment explores, develops, produces, and transports crude oil and natural gas. The Downstream segment refines crude oil into petroleum and petrochemical products.

Total revenue was $235,916 million in 2022 and $214,672 million in the last twelve months. 

Chevron has about 11.2 billions of barrels oil equivalent (BBOE) for its 10-year reserve replacement. The firm has done a commendable job adding to its reserves faster than production. The firm’s assets are divided into shale & tight, conventional, heavy oil, deep water, and liquified natural gas (LNG) categories.

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Source: Chevron Investor Presentation

Revenue and Earnings Growth

Oil and gas majors grow revenue organically by exploring and developing new sources of both resources. This is inherently a capital-intensive endeavor. Companies expend efforts to find new oil and natural fields, adding to their reserves. Developing the areas often takes several years until production starts.

Next, technical innovation has resulted in a greater ability to produce oil and natural gas from existing sources. For example, companies have developed technologies like hydraulic fracking and horizontal drilling to lower the cost of accessing oil in difficult geological formations.

Lastly, Chevron periodically acquires smaller companies adding to its reserves. In 2023, the firm purchased PDC Energy for $7.6 billion and ChacraServicios. In 2022, it acquired Renewable Energy Group for $3.15 billion. Between 2019 and 2022, it bought Noble Energy and Puma Energy Australia. Chevron has also acquired smaller companies, like Beyond6 and Cover Cress.

However, despite these acquisitions, revenue and earnings growth have been inconsistent.

Competitive Advantage and Risks

As one of the biggest global oil and natural gas companies, Chevron has size and scale advantages. Oil and gas exploration, production, and refining are expensive, and larger companies have an advantage. They can spread the costs over a large base and produce more operational and cost efficiencies. Consequently, unlike a less efficient business, Chevron can remain profitable at lower oil and natural gas prices.

A primary risk for Chevron is environmental concerns because of potential oil spills or gas leaks. Chevron also produces petrochemicals, which are often hazardous if not properly handled. Spills, leaks, and unexpected events can cause fines, lawsuits, and reputational damage, especially if it is a major one. Likewise, refinery emissions, water pollution, and waste products are regulated, require permits, and present a risk if not correctly handled.

Another risk is the rising demand for electric vehicles, possibly impacting revenue and income.

Dividend Yield and Growth

The forward dividend yield is nearly 3.7% based on a dividend rate of $6.04 per share. This value is below the 5-year average of roughly 4.5%. High oil prices have caused investors to bid up the share price. In addition, the dividend yield is twice the average of the S&P 500 Index.

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Source: Portfolio Insight

Chevron is a well-known dividend growth stock. According to Dividend Radar, the company has increased dividends for 36 consecutive years. As a result, Chevron is a Dividend Aristocrat and a Dividend Champion. The last quarterly dividend increase was to $1.51 from $1.42 per share. Investors should expect annual increases in the early part of each year.

Despite an excellent payout ratio value, the dividend growth rate is only, on average, 5% – 6% annually. Chevron is a mature company whose revenue depends on fluctuating oil and natural gas prices. Consequently, the firm prudently keeps dividend growth stable and steady.

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Source: Portfolio Insight

Chevron (CVX) Dividend Safety

Chevron (CVX) has outstanding dividend safety metrics from the context of earnings, free cash flow (FCF), and the balance sheet.

The forward payout ratio is very conservative at approximately 36% based on adjusted earnings per share. This number is calculated from the $6.04 annual payout and consensus earnings of $13.25 per share in 2023. Ideally, we like a value lower than 65%. Hence, Chevron’s dividend safety is high based on earnings. 

Furthermore, the dividend is safe from the view of FCF. In the last twelve months, FCF was approximately $27,642 million. The dividend required $11,131 million, resulting in a dividend-to-FCF ratio of around 40.3%. Our target value is 70% or lower; thus, the dividend safety is solid based on this metric.

Chevron’s balanced financial position is sound from the perspective of dividend safety. At the end of Q2 2023, Chevron held ~$9,610 million in cash, cash equivalents, and marketable securities on its balance sheet. In addition, the firm had $1,269 million in short-term, $0 million in current long-term debt, and $20,245 million in long-term debt. Chevron has a minimum leverage ratio of 0.23X and interest coverage of more than 75X. As a result, debt is not a risk for the dividend.

Moreover, Chevron’s AA-/Aa2 high-grade investment credit rating provides more confidence about the balance sheet and dividend safety. Furthermore, the dividend quality grade is a ‘B,” but primarily due to inconsistent revenue and earnings growth between 2015 and 2020 caused by varying oil and natural gas prices.

Chevron’s Valuation

Chevron’s share price has risen since the COVID-19 bear market. The price is near the all-time high, but the price-to-earnings (P/E) ratio is only ~12.4X. This stock trades at a reasonable multiple compared to the S&P 500 Index. But the valuation is in the middle of the 5-year P/E ratio range. In addition, the dividend yield is at the higher end of the 5-year range. The stock is probably fairly valued at this point.

Final Thoughts About Chevron (CVX) Dividend Safety Analysis

Chevron is an attractive stock with the proper valuation and dividend yield. Unfortunately, high oil prices have caused investors to buy shares, driving the stock price and increasing the P/E ratio. Investors may want to wait for a better entry point. But for those seeking income, the dividend safety of Chevron is excellent.

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