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Dividend Aristocrat Chevron Is Top Oil Supermajor

Dividend Aristocrat Chevron Is Top Oil Supermajor
Mohamed Ahmed Soliman | Dreamstime.com

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Wednesday, 07 August 2019 02:21 PM Current | Bio | Archive

Chevron Corporation (CVX) traces its roots back to the beginning of oil exploration and production in the U.S. The company’s predecessor, Standard Oil, was founded in 1870, and after it created a monopoly was broken up in the early-1900’s. Chevron was one of the products of that break up.

Today, Chevron is an oil supermajor with a market capitalization above $200 billion. Chevron, like many other oil supermajors, generates much more cash than it needs to invest in the business. This leads to share repurchases and strong dividend payments from many large-cap oil stocks.

Chevron has underperformed the market thus far in 2019, but Chevron’s 4% yield is twice that of the broader market. And given the company’s growth outlook, we see the combination as attractive at current prices.

Positioning for Long-Term Growth

Chevron is the third-largest oil supermajor in the world by market capitalization. This puts it behind only ExxonMobil (XOM) and Shell (RDS-A) in terms of market capitalization among oil companies.

Chevron generates the vast majority of its earnings from its upstream business, which means it is much more leveraged than its large peers to the pricing of oil and natural gas. In particular, Chevron’s production is roughly 60/40 in favor of crude oil to natural gas, so it is highly dependent upon oil prices. The company should produce about $157 billion in total revenue this year.

Chevron has tried to position itself for long-term growth in recent years, but some missteps have meant that it has stumbled somewhat. However, given that investments in oil and natural gas often take several years to start producing meaningful growth, we think Chevron has turned the corner.

The company has substantially reduced its capital expenditures in recent years as a cash crunch driven by significantly lower oil prices a few years ago, but it is also seeing the benefit of prior investments. Indeed, output expanded by 5% two years ago, and 7% last year, while the company expects output to grow at least 3% annually through 2024.

Chevron’s Q2 earnings report showed strong earnings, which was partially the result of the $740 million breakup fee resulting from the company’s failed acquisition of Anadarko Petroleum (APC). Revenue was down 8% to $38.8 billion as lower oil and gas prices were partially offset by record quarterly production volumes.

Total production increased 9.1%, and upstream earnings increased 5.7% to $3.5 billion, while downstream earnings declined 13% year-over-year. Chevron produced $13.8 billion in cash flow last quarter, which was up 16% year-over-year, while capex was up 10% to $5.3 billion.

We expect Chevron to generate $7.40 in earnings-per-share this year and 7.5% EPS growth annually for the next five years. Share repurchases and higher production volumes will drive its earnings growth, though we note that Chevron is still beholden to oil and gas pricing.

Capital Returns Remain A Priority

Many investors are drawn to oil supermajors like Chevron because of its capital returns. Chevron does not disappoint in this area, as the stock has a 4% dividend yield, which is roughly double the broader market yield. We like Chevron for its growth outlook, valuation near fair value, and of course, its nearly-4% yield. Plus, Chevron is a quality dividend growth stock. It has raised its dividend for over 30 years in a row, placing it on the exclusive list of Dividend Aristocrats.

Chevron stock has a modest valuation, trading for 16x this year’s earnings, which is only slightly in excess of our fair value estimate of 15.8x.

While shares could be cheaper, we think Chevron has turned the corner in terms of growth and investors that can wait will be rewarded with a very strong yield. Given the ~4% yield, fair valuation, and 7.5% earnings growth, we expect annual returns above 11% over the next five years.

This is a high projected rate of return, making Chevron a particularly attractive dividend growth stock and one of the best oil supermajors in the world.

Ben Reynolds is CEO of Sure Dividend. Sure Dividend helps individual investors build high quality dividend growth stock portfolios for the long run.

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BenReynolds
Chevron has underperformed the market thus far in 2019, but Chevron’s 4% yield is twice that of the broader market. And given the company’s growth outlook, we see the combination as attractive at current prices.
chevron, dividend, aristocrat, oil, supermajor
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2019-21-07
Wednesday, 07 August 2019 02:21 PM
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