Chevron (CVX): A Dividend Growth Opportunity

WTI crude oil price has had a wild ride these past few years. It had been as high as $109 per barrel in 2013 and as low as $0 per barrel during the COVID-19 pandemic in March 2020. These oil price volatilities brought down the stock price of many oil companies during this time frame. However, since March 2020, WTI crude oil prices have recently climbed to a high of $60 per barrel. Where there is a lot of price fluctuations, there are opportunities. Today, I want to discuss a great company, Chevron Corporation (CVX) that provides an excellent opportunity for dividend growth investors in the oil sector and has a solid yield and decent dividend growth rate.

As with the price of WTI crude oil, Chevron’s stock price was not immune to volatility. For example, in 2014, the price per share for Chevron was as high as $133.88, but in 2015, it went down to $73.09 per share. It eventually went back up to $130 before the COVID-19 pandemic when the stock price plunged again. This was when the price of WTI per barrel went to $0. Chevron was the one of the three worst performing Dow Jones stocks in 2020. Furthermore, Chevron started 2021 as one of the Dogs of the Dow.

As you see, Chevron’s stock price does tend to follow the price of WTI per barrel. This chart is from StockRover*. However, this is where the opportunity for long term dividend growth investors come in for those interested in Chevron.

Overview of Chevron

Chevron Corporation (CVX) is an integrated global energy company with operations across the world. The Company operates in two segments, Upstream and Downstream. The Upstream segment is involved in the exploration, development, and production of crude oil and natural gas. The Downstream segment engages in refining crude oil into petroleum products and manufacturing and marketing commodity petrochemicals. In 2020, Chevron had $94,471M in revenue, which was less than half of 2011 or 2012.

Chevron Dividend History, Growth Rate, and Yield

Chevron’s Dividend Growth

While many oil companies have been cutting or slashing its dividend, Chevron has maintained its dividend of $1.29 per share per quarter. Chevron has been growing its dividend for 33 consecutive years. Again, I use StockRover* for this chart. Chevron has averaged a dividend growth rate of 6.2% for the past ten years, and a 6.3% growth rate for the past three years. Chevron is considered a Dividend Aristocrat and it is also a Dividend Champion.

A Dividend Aristocrat is a company that has been growing its dividend for 25 or more consecutive years. However, because of the pandemic and the fact that the WTI crude oil price hit as low as $0 per barrel, Chevron has not raised its dividend in 2020. The Company is at risk of losing the Dividend Aristocrat title if the management team does not increase the dividend this year. They have until the end of the year.

Chevron’s Dividend Yield

The Company has an outstanding dividend yield right now. The yield sits at about 5.5% as of this writing. This is a lot higher than the current S&P 500 dividend yield of 1.57%. 

Chevron’s current dividend yield is higher than its own 4-year average dividend yield of 4.47%. Take a look at the chart below from StockRover*. I like to look at this metric because it gives me a good idea if a company that I am researching is undervalued or overvalued based on the current yield and 4-year average yield. Price and yield correlate with one another. If the price goes higher, then the yield goes lower and vice versa as well.

Chevron’s Dividend Safety

While Chevron does have a high dividend yield, the next important metric is the dividend payout. I want to know if Chevron can continue to pay out its high dividend. Based on operating cash flow for the full year of 2020, Chevron has a dividend-to-operating cash flow ratio of 92%. This is very high and even unsafe. However, consider that the dividend-to-operating cash flow ratio is based on a year where we had a world pandemic and WTI oil price reaching zero dollars per barrel, it is much safer than it appears. For example, analysts expect that Chevron will have a dividend-to-operating cash flow ratio of 41% for the full year of 2021. This is right in line with Chevron’s historical values. This is why I consider Chevron’s dividend to be safe. 

The dividend is also covered by free cash flow (FCF) for FY2021. Consensus estimates that FCF for 2021 will be around $8.25 per share. This gives a dividend-to-FCF ratio of 62%. The dividend-to-FCF ratio covers the dividend very nicely. This is in line with more “normal” years like 2018 and 2019, when Chevron made $8.82 and $7.05 respectively in FCF. Thus, this makes the current dividend yield very attractive. 

Chevron Revenue and Earnings Growth / Balance Sheet Strength

Chevron’s revenue and earnings have been very erratic though out the years. This has to do with the volatility of the oil prices as we have seen in the past five years. However, a more reliable growth indicator is to look to at the operating cash flow (OCF). Operating cash flow has been flat for the trailing 10-years with a negative growth rate of (0.40%), but analysts expect operating cash flow to grow this year and the following years at around 10%-15%. This will help cover the dividend for the foreseeable future.

Chevron has an outstanding balance sheet that should allow the company to navigate through any stor, such as through the 2015 oil collapse and last year through the COVID-19 pandemic. The Company has an S&P credit rating of AA, which is an investment-grade quality, but was recently lowered to AA- two week ago. Also, Chevron has only a 0.3 debt-to-equity ratio, which is very low considering how capital intensive the oil industry is. Overall, Chevron’s balance sheet is well built.

Chevron’s Valuation

One of the valuation metrics that I like to look for is the dividend yield compared to the past few years’ histories. I also want to look for a lower PE based on the past 5-year or 10-year average. I also like to use the Dividend Discount Model (DDM) because a business is ultimately equal to the sum of all the future cash flow that that business can provide.

Let’s first look at the PE ratio. Currently, CVX has a PE ratio of 26.9 based on fiscal year (FY) 2021 earnings of $3.48 per share. The PE is pretty high for a slow-growth type of stock like Chevron. However, if we look at the cash flow valuation, we see that Chevron has a price-to-cash Flow (P/CF) of 7.4 based on FY2021 operating cash flow expectations. This is lower than the 10-year P/CF average of 8.4. If Chevron were to revert back to a P/CF of 8.4, we would obtain a fair price of $103.83 per share.

Now let’s look at the dividend yield. Like I mentioned, the dividend yield currently is about 5.5%. Looking at Chevron’s own 5-year dividend yield average of 4.35%, there is a potential upside. For example, if Chevron were to return to its dividend yield mean, the price target would be $117.70. 

The last item I like to look at to determine a fair price is the DDM analysis. I factored in a 10% discount rate and a long-term dividend growth rate of 5% for Chevron slightly below the trailing 10-year average. That projected dividend growth rate is a little lower than its 10-year average. I’m essentially expecting Chevron to continue growing the company and dividend as they’ve been doing. This gives us a fair price target of $108.36 per share.

If we average the three fair price targets of $103.83, $117.70, and $108.36, we obtain a reasonable price of $109.96. This gives Chevron a decent upside. 

Final Thoughts on Chevron – A Dividend Growth Opportunity

Chevron Corporation is a high-quality energy company with a massive scale and fantastic global assets. With a roughly 5.5% dividend yield, a well-covered dividend, more than 33 consecutive years of dividend raises, inflation-beating dividend growth rate, and the potential that shares are undervalued, dividend growth investors should consider looking at Chevron further as a candidate to grow their portfolios and to provide reliable income.

Disclosure: Long CVX

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