• Chevron’s recent quarterly earnings have only confirmed that the current strategy is working with long-term shareholders in mind.
• At the same time, the drop in share price over the past year has reduced risk for shareholders and improved future returns.
• Chevron is now back in growth mode, and 2024 could be another good year to increase existing positions in the stock.

After a challenging 2023 for the Oil & Gas sector stocks overall, Chevron’s (NYSE:CVX) better than expected fourth quarter results last week came as a surprise to most market participants. It now appears that the stock could be on track to close the performance gap with the sector ETF – Energy Select Sector SPDR Fund ETF (XLE).

To be fair, the 3% share price jump on the day of the report was not substantial but in my view CVX is once again becoming less appreciated by the market than it should be. Just as it was in 2021.

At the same time, the lacklustre performance of Chevron in 2023 was largely expected and is now giving long-term shareholders (like myself), an opportunity to buy at prices that are more in-line with fundamentals.

After a year of exceptionally high returns, Chevron could face near-term volatility, but there are strong reasons why long-term investors should not fall victim to narratives and market speculations. (…) While returns in 2023 are unlikely to be as high as they were back in 2021 and 2022, I expect the company to continue to outperform the market.

Source: Seeking Alpha

Returning To Growth

The main reason why I remain on Chevron’s long-term potential is the management’s focus on profitable growth. Lack of investments in the Oil & Gas sector in recent years, as well as struggling competitors, has created an opportunity for the management team to pursue only the best and most profitable projects out there.

I covered all that in further detail back in late 2022, when I highlighted some key areas for long-term investors to focus on.

For those focused on the more immediate future and investors with short-term investment horizons, the sharp drop of Chevron’s Return on Capital Employed in FY 2023 is worrisome.

Due to the cyclical nature of the industry, such deviations are to be expected due to the impact of commodity prices on Chevron’s upstream results (see below).

Given Chevron’s unique positioning, however, it was largely the U.S. Upstream segment that suffered in 2023 and International upstream earnings remained resilient in 2023.

This does not mean that the strong relationship between oil prices and the upstream earning of Chevron has gone away (see below), but it highlights an unique competitive advantage of being a global-integrated Oil & Gas Major – the ability to generate significant economies of scale and thus continue to invest even during significant market downturns.

Now that the worst for the Oil & Gas sector appears to be behind us, Chevron’s investments through the bottom of the cycle start to pay off and with that production growth picks up. From a flat to +3% expected at the end of FY 2022, to +4% to +7% during the latest earnings release.

Capital expenditures are also gradually increasing with organic Capex expected to increase to $15.5bn – $16.5bn, up from $14bn expected as of last year. As we will see down below, this will have negative implications for Chevron’s extremely high free cash flow yield at the moment.

Nonetheless, over the past year the stock has become more attractively priced relative to the company’s business fundamentals.

How Is Chevron Priced?

In spite of the annual fluctuations of Chevron’s ROCE that we saw above, the relationship with the stock’s Price/Book multiple is worth monitoring. The R-squared between the two variables is not particularly high on an annual basis for the period 2010-2023, but the relationship gives a very good indication of where CVX stock price is relative to actual business fundamentals (see the graph below).

For example, in FY 2020 the stock was priced as if the negative ROCE will persist indefinitely – a case that was highly unlikely not only for CVX, but for Exxon Mobil (XOM) as well. We saw the opposite dynamic play out in FY 2022 and the first half of 2023 which is why I have become more cautious on the stock’s short-term potential.

At present, CVX is priced in the middle of these two extreme scenarios based on its current ROCE and this is making me more optimistic on the stock. Not because I try to anticipate short-term movements in oil & gas prices, but rather because of the strong competitive positioning of the company over the long-run.

On a free cash flow yield basis, CVX now appears less attractive than it was a year ago, but due to the cyclical nature of the business this metric could be misleading.

The lower free cash flow yield does not mean that CVX is less attractive now than it was in FY 2022, once we consider the record cut in capital expenditures in 2020-21 period. Instead of looking at Capex in total amounts, it is worth comparing the amount reinvested back into the business to the annual depreciation & amortization expense (D&A) in order to get an idea of whether the business is expanding or contracting.

As of the end of FY 2023, Chevron is about the break the 100% barrier and with that it will be back to growth mode in 2024 – something that we haven’t witnessed in 7 years.

Even though it took a couple of years for Chevron’s Capex to return to normal, the company’s recent acquisitions have also positioned it well within the Permian, where it could extract significant returns on invested capital while significantly expanding production in the coming years.

(…) we expect production in the first half of the year to be down from the fourth quarter by about 2% to 4% before climbing toward a 2024 exit rate around 900,000 barrels per day. Chevron is a clear leader in Permian financial returns with our unique royalty advantage and strong execution across a diverse portfolio. We have strong momentum and expect to achieve 1 million barrels of oil equivalent per day in 2025.

Source: Chevron Q4 2023 Earnings Transcript

Conclusion

As Energy sectors is slowly falling out of favour once again, share prices of high quality companies, such as Chevron, become more closely aligned with their current business fundamentals. Chevron in particular is among the best-positioned Oil & Gas Majors to deliver superior long-term shareholder returns. The most recent quarter has only confirmed that the company is on the right track to grow production, improve existing competitive advantages and reward patient long-term shareholders.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of CVX either through stock ownership, options, or other derivatives. 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.

Please do your own due diligence and consult with your financial advisor, if you have one, before making any investment decisions. The author is not acting in an investment adviser capacity. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. The author recommends that potential and existing investors conduct thorough investment research of their own, including a detailed review of the companies' SEC filings. Any opinions or estimates constitute the author's best judgment as of the date of publication and are subject to change without notice.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• Chevron Corporation’s recent stock price correction has created an entry opportunity for investors looking for a dividend stock.
• Chevron has a strong dividend record, attractive valuation when adjusted for growth and yield, and a history of share buybacks.
• All meeting or surpassing Peter Lynch’s criteria for picking dividend stocks.

Thesis

Readers following our writings know that we have been long-term bulls for Chevron Corporation (NYSE:CVX). We have been arguing for a bullish thesis on the stock since early 2022, when the stock price was in the $130 range. Its stock price then rallied robustly and reached as high as $185 in early 2023. Since then, the stock price has suffered a correction of around 19% (see the chart below). And the thesis of this article is to argue that such correction has created an entry opportunity for this superb dividend stock.

Given the emphasis on dividends, in the remainder of this article, I will build my thesis largely around the framework Peter Lynch developed for screening dividend stocks. The Lynch framework has been detailed in our other writings and only a recap is provided below. As to be seen later, this seemingly simple framework actually provides a holistic assessment of a given stock.

1. Dividend record. Of course, since we are talking about dividend stocks, long records of regularly raising dividends are always a plus. Lynch prefers to see a 20 to 30 years record or regularly raising dividends.
2. Valuation. Most people are familiar with the earnings growth rate (the PEG ratio) and Lynch prefers a PEG of around 1x or below. For dividend stocks, he also developed a modified PEGY ratio, which stands for Price/Earnings to Growth and Dividend Yield. We will see that CVX offers a very attractive PEGY ratio.
3. Share buybacks. And Lynch recognized the importance of share buybacks (an aspect many dividend investors overlook). Buyback is a clear indicator of financial strength (the company has extra cash flow that exceeds CAPEX) and management confidence in their existing business (so they chose to buy back than expand into new segments).

1. Dividend record

The Lynch framework places an emphasis on dividend record for a good reason. Consistency is the key here. A consistent dividend record in the long run speaks volume of the staying power of the stock and its moat.

On this front, CVX has one of the strongest records. As seen in the chart below, it has been raising its dividends for 36 years consecutively thus far, surpassing Lynch’s criterion of 20~30 years.

2. Valuation

Admittedly, when we just look at the simple P/E ratios, CVX is not the stock that offers the most attractive valuation. As seen in the chart below, CVX now trades at 12.1x on an FY1 basis, a multiple higher than many of its peers both in the U.S. and especially abroad.

However, Chevron’s valuation is much more attractive when properly contextualized. And since I am following the Lynch framework, here I will use the Lynch PEGY ratio for this purpose. Furthermore, I will use CVX’s dividend growth rate to approximate its earnings growth rate. Given CVX’s 36 years of consecutive dividend growth record, I will argue that this is a very justifiable assumption.

Accepting this assumption, the chart in section 1 shows that CVX’s dividend growth rate was 6.16% on a CAGR basis in the past 5 years and 5.39% in the past 3. CVX’s current dividend yield is 4.28% on an FWD basis. As such, its PEGY ratio works out to be 1.16x if we plug the 5-year CAGR and 1.25x if we plug in the 3-year CAGR. In either case, it is quite close to the ideal 1x pick that Lynch promotes and far more attractive than many of its peers (say Exxon Mobil (XOM)).

3. Share buybacks

Historically, CVX has systematically shrunk its outstanding shares through consistent buybacks. As seen in the chart below, in the past five years alone, it has maintained an average buyback yield of 2.06%, effectively boosting shareholder returns by an average of ~2% annually and far higher than XOM’s 1.21%. To paraphrase Lynch, such buybacks are a very loud way for CVS to say that “We like our stock, too!”

Other thoughts and final verdict

In terms of risks, CVX faces risks that are generic to the energy sector, such as macroeconomic uncertainties, environmental regulations, et al.

Here, I will focus on an aspect most investor overlook: inventory. As seen in the chart below, CVX current inventory sits at 22.05 days (top panel). It is a level that is on par with its long-term historical average but is significantly lower than close peer like XOM. There are several advantages to maintaining a low inventory for a company. A lower inventory helps to reduce carrying costs and improves cash flow. Less inventory means less money tied up in storage, insurance, handling, and other carrying costs. Lower inventory frees up cash that can be invested in other areas like marketing, research & development, or expansion. However, maintaining a sizable inventory in the oil industry comes with several unique risks due to the inherent nature of commodities and the volatility of energy prices.

Oil and natural prices exhibit significant swings, and holding a sizable inventory could expose CVX to potential risks. An oil price fluctuation (say a swing from $80 per barrel to $60) could cause balance sheet risks. A sizable inventory could also cause carrying/operating costs such as storage fees, insurance, security, and potential quality degradation. These costs eat into profits, especially if prices are falling.

All told, my thesis is that under current conditions, Chevron Corporation offers more positives than negatives. In a nutshell, I see a dividend king at an attractive valuation thanks to recent corrections. In particular, when adjusted for its dividend yield, share buybacks, and growth rates, CVX currently offers very appealing valuation both in absolute terms (PEGY ratio is close to Lynch’s ideal 1x pick) and also in comparison to its close peers.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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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• Chevron is improving its process of selling noncore (and often older) production, which is expected to benefit shareholders more than previous sales.
• The company’s strong balance sheet allows it to hold properties until market conditions improve, potentially recouping at least some losses from previous write-offs.
• Chevron’s acquisitions and plans for growth make it a strong buy for both growth and income investors.
• The common stock also has some recovery potential.
• EQT received quite a bottom when Chevron sold natural gas properties at the bottom of the market a couple of years back.

Chevron (NYSE:CVX) recently announced the beginning of the sale process of some (or all) of its Duvernay production. This is a big improvement over some of the sales actually executed in the past. In a previous article, I noted that Chevron wrote down some natural gas properties and then turned that paper loss into a big real loss by selling those properties to EQT (EQT). Exxon Mobil (XOM) on the other hand waited to sell the same type of properties until the recovery was well underway, as it has many times in the past. The current Chevron sale is likely to do a lot better for Chevron shareholders than any bottom-of-the-market sales.

Hopefully, Chevron management “cleans house” in the current market. This is not so much about timing sales to hit the exact market top of good prices as it is about avoiding obviously hostile conditions that lead to at least close to maximum losses.

Chevron has a very strong balance sheet. Therefore, management can definitely hold properties that need to be sold until market conditions are much better than they were a couple of years back. There is every chance that the sale cost shareholders billions (because the write-off was that big). Whereas, waiting for better market conditions likely would have recouped at least some of that write-off.

EQT reported paying roughly $700 million for properties that were on the books for far more until the write-off. Management crowed about the deal ever since. Credit EQT management for getting a good deal. But also note that the Chevron sales of noncore properties had to improve.

The problem with write-offs is that companies often use very conservative assumptions to maximize the write-offs. This then leads to better-than-expected profits on the remaining book value. So, the accounting game is to be very conservative with the write-offs while taking a more aggressive stance with what is left. This minimizes noncash charges like depreciation because the assumed life or reserves is on the aggressive side. This “game” allows for a lot of charge-offs in poor years, followed by “brilliant” performance during the recovery and later years.

The market attempts to counter this by valuing companies over the whole business cycle profitability. That is not always a success, as the current environment shows some thermal producers “taking off”. The thermal crowd often has high breakeven points and the lower average profitability that goes with it. But the “game players” win if the market gets enamored with the profits while forgetting the big losses.

Chevron is large enough to change its policies going forward by making sure everything that could possibly be sold gets sold during the current market conditions. Then like other companies such as Exxon Mobil, there is no need to sell anything during a time of very weak prices. It can be worth a lot of money to Chevron shareholders going forward should this practice prove to be the case in the future.

Comparing To Third Quarter

Chevron had a whole lot of temporary issues in the last conference call that appeared to have some effect on the stock price. Investors should look for those issues to begin to fade with the current fourth quarter conference call about to report.

There was a combination of delays and cost overruns in the Kazakhstan project. That is a fairly major project for the company. However, there was nothing going on there that could not be resolved to bring things back on track. Chances are very good the company will be involved in this project for years to come. Therefore, management is likely to learn from what happened and use that knowledge to the advantage of shareholders in the future.

Another big item was the acquisition of Hess (HES) by the company. Along with that acquisition comes the joint venture with Exxon Mobil in Guyana. The next-door neighbor, Venezuela, has been making all kinds of noises about that. But the United States and Great Britain have a presence, while Brazil now has troops along its border with Venezuela. That should be enough to put a stop to anything resembling an action by Venezuela. Besides, Venezuela only sent 5,000 troops to the border. That is a symbolic level rather than an actual threat level. Lately, things have been rather quiet. But there is likely to be more saber-rattling (at best) as Venezuelan elections approach for what appears to be a very unpopular government.

The last thing that upset the market was overall prices obtained. But many of the large companies like Chevron “take what they can get” at the time of the sale. Management explained that a lot of what happened was timing. That timing was unfortunate. There is also likely to be future quarters where the reverse is true.

The Stock Price

All of this tanked the stock price in this very momentum-based market. The fact is that many of us were praying for the current price environment that is now regarded as either low pricing or weak pricing.

Even with the rally, the current stock price is well below the previous highs. The stock may face some near-term headwinds because the purchase of Hess will be for stock. Chevron has made some other acquisitions as well in the past few years. The stock price should recover the lost ground to make it to higher high prices in the future. This assumes that management will continue to successfully build the business through opportunistic acquisitions and slow growth.

If shareholders believe that management will be growing production and that the acquisitions were at least reasonable, then there is every chance this business will grow from the acquisitions with single digit growth from the strategy well into the future.

The sales of non-core properties often reduce costs while lowering the corporate breakeven points. Not every single deal has to be correct or “perfect” for there to be future growth. All that has to happen is the benefits need to outweigh the deficiencies. For a company with Chevron’s history and reputation, that is very likely.

The large integrated companies have the balance sheet and the presence to beat back the market expectations of return of capital. Therefore, a company like Chevron is likely to grow production. That growth will be aided by opportunistic acquisitions. The stock price obviously has some recovery potential (unless you think the business will suddenly shrink for some reason).

Meanwhile, the plans to grow the business should lead to low double-digit returns from the dividend and slow growth. That makes this company a strong buy for growth and income investors. The low risk level of a company with a high debt rating combined with the integration may make the returns appeal to a wide variety of investors.

The oil and gas industry tends to outperform a choppy market. The price-earnings ratio shown above is one of the lowest of the major companies I follow in this market for a large company like this. The risk that a company like this “turns south” is very low.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of HES EQT XOM either through stock ownership, options, or other derivatives. 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.

Disclaimer: I am not an investment advisor, and this article is not meant to be a recommendation of the purchase or sale of stock. Investors are advised to review all company documents and press releases to see if the company fits their own investment qualifications.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

Long Player believes oil and gas is a boom-bust, cyclical industry. It takes patience, and it certainly helps to have experience. He has been focusing on this industry for years. He is a retired CPA, and holds an MBA and MA. He leads the investing group Oil & Gas Value Research. He looks for under-followed oil companies and out-of-favor midstream companies that offer compelling opportunities. The group includes an active chat room in which Oil & Gas investors discuss recent information and share ideas. Learn more.

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• Value investments have significantly underperformed, with the relative valuation of value to growth stocks at a 20-year low.
• Growth stocks have been driven by the belief that the Fed has won the fight against inflation, but inflation remains a concern.
• Energy stocks, including Chevron Corporation, are the cheapest sector in an overvalued market and could benefit from a potential rotation to value stocks.

A Lengthy Introduction About Value & Energy

If there’s one thing I’ve discussed repeatedly with my friends and colleagues in the investment world, it’s that the past few months have started to feel like 2020/2021 again.

Don’t get me wrong, I’m not complaining about this market (I have no shorts).

We’re just witnessing some remarkable developments, including the significant underperformance of “value” investments.

As we can see below, the relative valuation of value to growth stocks ended 2023 close to a 20-year low.

The last time value investments performed this poorly was during the quarters after the first wave of lockdowns ended in 2020, when cheap money flooded the market.

This is unusual. Not only is value very cheap compared to growth, but it is also unusual given the state of rates.

While I am writing this, the U.S. 10-year yield (US10Y) is at 4.1%. As the chart above shows, once rates cross the 3% mark, it becomes increasingly likely that value investments outperform.

This makes sense, as growth stocks prefer low rates and low inflation, which makes discounting future growth much more attractive.

What has driven growth stocks is the belief that the Fed has won the fight against inflation. It has resulted in expectations of six rate cuts this year!

Sure, inflation has come down a lot, and I am not going to make the case that the Fed has no room to somewhat ease rates.

My point is that the risk/reward for the market, in general, has become unfavorable.

Among other reasons:

• Core inflation is still close to 4.0%.
• WTI crude oil is close to $80 (despite economic pressure).
• Tech stocks have been flying lately.
• Home prices are close to record highs.

This is NOT an environment that will allow the Fed to easily reduce rates by 150 basis points this year, at least not without potentially igniting a second wave of inflation.

Bear in mind that one of the biggest fears the Fed has is not preventing a second wave of inflation.

This is what NPR wrote in 2022 (emphasis added).

But the Fed is doing it in the hopes of dousing high inflation, before it ignites a long-smoldering dumpster fire. “The longer the current bout of high inflation continues, the greater the chance that expectations of higher inflation will become entrenched,” Fed chairman Jerome Powell said last week.

It’s a lesson born of the country’s painful experience with runaway prices in the 1970s, when Americans sported “Whip Inflation Now” buttons on their wide lapels.

“I came of age and studied economics in the 1970s and I remember what that terrible period was like,” Treasury Secretary Janet Yellen told a House subcommittee last year. “No one wants to see that happen again.”

As a result, I believe that growth stocks have gotten a bit ahead of themselves.

Sure, the AI trend has added tremendous growth potential on top of ongoing secular demand drivers like cloud computing, connectivity, and whatnot.

However, the valuation has gotten lofty.

Looking at the data below, we see that:

• Large-cap value stocks are trading at 14.9x earnings, which is slightly above the long-term average of 13.7x earnings.
• Large-cap growth stocks are trading at 26.5x earnings, way above the long-term average of 18.9x earnings.

On top of the current unfavorable risk/reward, I believe that there are some drivers that make it likely that overall inflation will remain at above-average levels on a prolonged basis.

One of these factors is energy, which is also the cheapest sector on the market.

As we can see below, energy stocks are trading at the lowest relative valuation of all sectors. Other cheap sectors are staples, communication stocks, and utilities, all of which have been victims of the environment of elevated inflation and rates.

As almost all of my frequent readers know, I have written countless articles on the energy sector.

I believe that unlike in the 2009-2021 period when cheap energy paved the way for subdued inflation, new developments will likely do the positive, especially once global economic growth expectations rebound.

Last year, Goehring & Rozencwajg wrote a research paper making the case that, for the first time in history, crude oil has entered a structural deficit.

Despite the recent correction in oil prices, the report argues that this is a temporary setback in an otherwise robust bull market.

Notably, the mineral and royalty market in the United States has transformed from uninvestable to a must-own asset, with prime acreage prices soaring.

In a market where supply growth engines like the U.S. shale industry are running out of their best drilling spots, massive deals like Exxon Mobil’s (XOM) purchase of Pioneer Natural Resources (PXD) and Chevron Corporation’s (NYSE:CVX) acquisition of Hess (HES), totaling $120 billion, signal a pivotal shift in the oil industry.

These transactions, driven by the scarcity of prime undrilled acreage, emphasize the changing dynamics of the market.

Even the mighty Permian Basin is expected to see peak production this year.

We now calculate the Permian has also produced half of its reserves and expect sequential growth to turn negative within the next few months. With a growing degree of confidence, we expect 2024 will be the peak in Permian production. Over the last fifteen years, the US shales have represented all non-OPEC growth. In the previous five years, the Permian has dominated US shales. If correct, we are entering an unprecedented period of tightness in global oil markets. – Goehring & Rozencwajg.

Given that shale was the sole reason why the U.S. made a crude oil production comeback after decades of lower output, it is highly likely that global oil prices will benefit from subdued supply in the years ahead.

I believe that only economic weakness and new drilling technologies can keep oil prices subdued (below $70).

Once economic growth improves, I expect oil prices to reach triple-digit dollar territory.

This is highly beneficial for oil stocks.

• Energy is currently the cheapest sector in a somewhat overvalued market.
• Value stocks, in general, are very cheap compared to growth stocks.
• If the market starts to price in a less dovish Fed, it could trigger a rotation to value stocks, (likely) benefitting energy more than its sector peers.

That’s where Chevron comes in, a company that is a part of a number of investing accounts in my family.

In the remainder of this article, I’ll explain what makes CVX such an important long-term play in light of the developments discussed in this > 1,000-word introduction.

So, let’s get to it!

A Fantastic Conservative Way To Potentially Beat The Market

As I mentioned in the first part of this article, Chevron is one of the giants preparing for a future where players will compete for the best oil reserves in the market.

As reported in October of last year, Chevron is buying Hess in a deal worth $53 billion, one of the biggest oil M&A deals ever.

According to the Bloomberg article:

The acquisition will give Chevron a significant foothold in Guyana, the South American country that is one of the world’s newest oil producers. It will enable faster production growth and more generous returns to investors, according to the statement.

“The prize here is Guyana,” said Peter McNally, an analyst at Third Bridge Group. “And it’s only gotten bigger” since oil was first discovered in the country less than a decade ago, he said.

As we can see in the chart below, both Hess and Chevron are major players in Guyana’s offshore oil fields.

By buying Hess, Chevron gets a 30% ownership of more than 11 billion barrels of oil equivalent (“BOE”) of recoverable resources in the region!

Even without this deal, the company has taken good care of its reserves, as it has replaced almost every drop of oil it produced over the past ten years with new reserves.

In general, Chevron remains in a good spot to generate value for its shareholders.

As some readers may recall, my favorite oil play is Canadian Natural Resources (CNQ), which has a focus on special dividends.

However, there are reasons to opt for Chevron:

• Chevron is a U.S.-based producer, which means investors are not subject to foreign withholding taxes.
• Chevron is a diversified energy producer, covering both upstream and refining on top of investments in alternative energy sources.
• The company stands for safety and reliability, making it the cornerstone of the Energy Select Sector SPDR® Fund ETF (XLE) and countless investment portfolios, including the portfolio of some of my family members.

Over the past ten years, CVX has returned 94%, beating the XLE ETF by a wide margin. Meanwhile, the SPDR® S&P Oil & Gas Exploration & Production ETF (XOP) has returned negative 40%, as many of its holdings suffered due to poor balance sheets and low oil prices before 2021.

Chevron may not be exciting (that’s a good thing), yet it is all about consistency and reliability.

Despite a tougher operating environment, the company continues to do well.

In the third quarter, the company achieved robust earnings, cash flow, and return on capital employed (“ROCE”).

• The company delivered an ROCE greater than 12% for the ninth straight quarter in Q3 2023, which allowed the company to maintain a sub-10% net debt ratio and return roughly $20 billion to shareholders in the first three quarters of the year.

Adjusted earnings for the quarter were down $5.1 billion compared to the same period last year. The decline in upstream earnings was mainly attributed to realizations and negative timing effects, while downstream earnings were impacted by a negative swing in timing effects and lower marketing margins.

With regard to the aforementioned distributions, in the third quarter, the company spent $2.9 billion on dividends and $3.4 billion on buybacks.

Currently, CVX pays $1.51 per share per quarter in dividends. This translates to a yield of 4.0%.

The company has hiked its dividend for 36 consecutive years, which obviously includes the Great Financial Crisis, the 2014/2015 oil price crash, and the pandemic.

The five-year dividend CAGR is 6.2%.

While this may be underwhelming, given the post-pandemic surge in oil prices and pricing benefits in its refining segment, the company is playing it safe to prevent being forced to cut its dividend once prices crash again.

Currently, the dividend is protected by a low 40% payout ratio.

The company’s upside case, which is built on $85 Brent, foresees a lot of room for prolonged dividend growth, as it could generate close to $100 billion in cumulative cash earmarked just for buybacks – that’s more than a third of its current $282 billion market cap!

It is also in a great place to grow output in an environment of elevated pricing.

Ignoring the pending Hess deal, Chevron’s worldwide net oil and gas production experienced a 6% increase over the third quarter, driven primarily by the inclusion of legacy PDC Energy production for two months.

In the Midland & Delaware Basins (part of the Permian), the company aims to grow production to roughly 1.3 million barrels per day after 2027, which, when adding potential pricing benefits, could play a major role in free cash flow (“FCF”) generation – especially because the company expects to grow free cash flow in this area to roughly $5 billion with a ROCE close to 30%.

Looking ahead to the fourth quarter, the estimate for turnarounds and downtime included approximately 30 thousand barrels of oil equivalent per day for the Israelian Tamar oil field, which was halted due to the terror attacks in October.

Furthermore, the company anticipates affiliate dividends in the fourth quarter, primarily from TCO, which is a 50% Joint Venture investment in Tengizchevroil, a Kazakhstan oil company.

Meanwhile, share repurchases are expected to be restricted due to ongoing transactions, with an estimated repurchase amount of around $3 billion, plus or minus 20%, contingent on the timing of definitive proxy statement mailings related to specific transactions.

Needless to say, during the upcoming earnings call, I expect the company to explain how it will balance shareholder distributions and investments in growth – like the Hess transaction.

In this environment, I have little doubt that the company can use pricing to protect its balance sheet and stick to mid-single-digit long-term dividend growth.

With that said, the company is scheduled to release its earnings on Friday February 2 before the market opens. Analysts expect $3.29 in earnings per share, which is based on eight estimates.

Over the past four weeks, the company has received one upgrade and six earnings downgrades, which makes it somewhat likely that it can beat expectations.

Personally, I do not care too much whether CVX beats or misses its estimates. As long as it comes close to estimates, it will be fine.

The focus will be on the Hess deal and how CVX is capital spending on investments in growth and shareholder distributions. This also means that I expect no major stock price volatility on the earnings day.

Chevron Stock Valuation

Even without the incorporation of higher potential oil prices, CVX is cheap, which reflects what I wrote in the first part of this article.

Using the data in the chart below:

• CVX trades at a blended P/OCF (operating cash flow) ratio of 7.8x, which is in line with its long-term normalized valuation of 7.7x.
• This year (2024), OCF is expected to grow by 15%, potentially followed by a 6% rise in 2025 and 12% growth in 2026.
• The incorporation of its dividend, a 7.7x OCF multiple, and expected OCF growth pave the road for roughly 15% annual returns through 2026.

It also gives the stock a fair price target of $198, which is 32% above the current price.

The consensus price target is $177, 18% above the current price.

Personally, I believe potential returns will likely be much higher if oil prices get the benefit of bottoming global economic growth this year.

Although economic challenges could keep a lid on the price of oil or even pressure CVX in the short term, I am very bullish on the future of CVX, and I am currently buying the stock for various family accounts.

The only reason why I won’t disclose a long position in CVX is because I do not have a financial benefit from the CVX investments of family members.

I believe the mix of undervalued energy stocks, a looming rotation from growth to value, and oil supply issues make it a must-own stock for investors looking for income, capital gains, and inflation protection.

I also look forward to its earnings to learn more about the Hess deal and how the company aims to balance growth and shareholder distributions in the future.

Takeaway

In a market reminiscent of 2020/2021, the underperformance of “value” investments and soaring tech stocks create a favorable risk/reward scenario.

With inflation concerns persisting and a less dovish Fed on the horizon, a potential rotation to value stocks, especially in the energy sector, becomes likely.

Chevron, a cornerstone of stability, stands out. Positioned for sustained value, dividend growth, and impressive returns, Chevron Corporation’s strategic moves, including the $53 billion Hess deal, make it a conservative yet compelling choice amidst market uncertainties.

As economic conditions improve, Chevron Corporation stock emerges as a fantastic long-term play.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of CNQ either through stock ownership, options, or other derivatives. 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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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• Chevron Corporation’s stock buyback was criticized due to potential overpayment and risk of an earnings recession.
• OPEC’s production cuts have supported higher crude oil prices, benefiting Chevron’s profitability.
• Consensus estimates for Chevron’s profits in 2024 suggest no earnings recession, making the stock classification a Hold.

I criticized the stock buyback of Chevron Corporation (NYSE:CVX) last year as I saw a risk that the commodity company could overpay for its stock in the open market at a time when crude oil prices were still relatively high.

I was also deeply concerned about the potential for an earnings recession during a period of falling crude oil prices which led me to give Chevron Corporation a stock classification of Sell.

Chevron Corporation continued to profit from higher-than-average price realizations in its upstream business throughout 2023 and the baseline of profitability remained high in the third quarter. Thus, taking into account that Chevron Corporation has avoided an earnings recession so far and that prices remain fairly stable at $70/barrel, I think it is prudent to modify my stock classification to Hold.

OPEC Has Emerged As A Driving Force Of Crude Oil Supply Limitations

One reason why my thesis has not played out as expected (though I did not short Chevron Corporation) was that the cartel of oil producing countries has pushed for lower levels of production in order to prop up crude oil prices.

Crude oil output cuts have been supported by a large group of OPEC countries that recently came out in support of additional limits on production for 2024. These countries included Saudi Arabia, Iraq, the United Arab Emirates, Kuwait, Kazakhstan, Russia, Oman and Algeria all of which have agreed to lower production by a total of 2.2 million barrels in an attempt to keep crude oil prices high. The price of WTI crude oil, at the time of writing, is about $70/barrel which continues to create profit tailwinds for Chevron Corporation.

Though crude oil prices did decline in 2023, relative to the 2022 period which saw record crude oil prices, the profit situation at Chevron Corporation is not that bad, actually, and much better than I anticipated.

Chevron Corporation walked away with $6.5 billion in profits in the third quarter which reflected a YoY decline of 42%. Lower price realizations were mainly to blame for CVX’s YoY profit drop, but the company still produces a high baseline of profitability.

Chevron Corporation’s profits don’t just depend on higher prices to boost upstream profits, however. The commodity company also grows its production, particularly in the Permian, which is creating underlying organic and acquisition-driven growth that should, over time, also lead to a growing profit baseline.

In 3Q-23, Chevron Corporation produced 3,146 MBOED compared to 3,027 MBOED in the year ago quarter. In part, this growth was made possible through the acquisition of PDC Energy, an independent exploration and production company with assets in Ohio and West Virginia. PDC Energy was swallowed up by Chevron Corporation in 2023 due to its complimentary assets in the Denver-Julesburg and Permian Basins.

Will There Be An Earnings Recession In 2024?

To figure this question out, a good start would be to look at the consensus estimates for Chevron Corporation’s estimated profits for 2024. Projected 2024 profits for the company, based on Yahoo Finance data, are $14.08 which implies a positive YoY profit growth rate of 6%. Note that the profit growth rate at this point can only be calculated based on the 2023 profit estimate since Chevron Corporation has not yet reported 2023 results.

Based on the present consensus estimate for CVX’s profits in 2024, investors pay a 10.6x P/E for Chevron Corporation. Exxon Mobil Corporation (XOM) is anticipated to produce $9.17 in profits in 2024, reflecting an estimated YoY drop of 0.4%, which thus reflects a P/E ratio of 10.9x.

The consensus numbers for both XOM and CVX therefore don’t imply an earnings recession and though the U.S. economy is anticipated to see slowing growth in 2024 (+1.5% in 2024 vs. +2.4% in 2023), the backdrop is generally positive for energy companies.

Both Exxon Mobil and Chevron Corporation, based on consensus estimates, are therefore selling for approximately the same earnings multiple and neither one of them is either expensive or particularly cheap. Both companies also don’t seem to be overpriced when taking into account that OPEC has come out in favor of crude oil price support in 2023 and in 2024.

Lower-For-Longer Price Environment

Obviously, there are no guarantees that crude oil prices remain at or above the $70/barrel level. The turmoil in the Middle East is probably favorable for crude oil prices in general as is uncertainty surrounding key shipping lanes in the Red Sea which is where container ships have come under attack in recent months.

A U.S. economic recession, a decrease of geopolitical tensions and a crumbling OPEC front are key risks for Chevron Corporation.

My Conclusion

Chevron Corporation has not experienced an earnings recession so far and OPEC has played a vital role in ensuring that this didn’t happen.

New production cuts in 2024 are probable and even this year the energy company may avoid a large decline in crude oil prices, particularly if the economy keeps chugging along.

I misjudged OPEC’s determination to keep crude oil prices high and I think that the fact that WTI crude oil today still sells at a price above $70/barrel is a positive for the investment thesis.

Though I do see profit risks in a lower-price environment, I think that the resilience of Chevron Corporation’s earnings, which have been partially backed by production growth, is a reason for a change in the stock classification to Hold.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in CVX over the next 72 hours. 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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post I Was Wrong About Chevron’s Earnings Strength (Upgrade) appeared first on Up2info.com.

• Chevron investors have underperformed the S&P 500 since my October 2023 update. However, CVX’s November bottom has held firmly.
• Concerns over the dispute between Guyana and Venezuela may dampen CVX’s valuation re-rating in the near term. However, I view the weakness as an opportunity for investors to buy.
• Chevron remains well-positioned to leverage its capabilities and benefit from medium-term production growth in upstream, driving margin accretion further.
• The company is also confident of delivering its capital allocation framework even with lower energy prices.
• I argue why the recent Guyana fears are overstated, allowing opportunistic investors to buy more shares before the cyclical recovery takes CVX higher.

Chevron Corporation (NYSE:CVX) investors have underperformed the S&P 500 (SPX) (SPY) since my previous update in October 2023. I urged investors to maintain a bullish posture on CVX, notwithstanding the near-term earnings dilution impact due to its recent Hess Corporation (HES) acquisition. Although the acquisition is undergoing regulatory review, the market has likely reflected the near-term headwinds that saw CVX fall toward the $140 level in mid-November. While CVX consolidated constructively, as dip buyers likely gleaned an attractive opportunity, the heightened dispute between Guyana and Venezuela has likely raised the execution risks over its production in the region. Coupled with Hess Corporation’s exposure, the market could be concerned whether the uncertainties could dampen CVX’s upward valuation re-rating in the medium term.

However, while the near-term caution is justified, Chevron investors must be prepared to ride it out. Why? Exxon Mobil (XOM) had already cautioned that the “resolution of the dispute over Guyana’s Essequibo region may take a couple of years.” In addition, Chevron highlighted its confidence that the disagreements “are not expected to escalate into a military conflict.” Sure, bearish investors might point out that Venezuela recently deployed troops to its “eastern Caribbean coast,” elevating the temperature in its dispute with Guyana.

However, with the downward de-rating in late October, as Chevron reported a sharp decline in its operating performance, I assessed that it has not caused holders to capitulate further. Consequently, it indicates that the market seems confident enough as buying sentiments have remained robust. Chevron is still optimistic about reallocating its focus on upstream production growth to drive its margins higher.

The leading oil and gas integrated company stressed that its portfolio “is moving back towards an 80-20 or 85-15 weighting between upstream and downstream.” As a result, Chevron is leveraging its ability and assets to drive growth, even as energy futures have likely peaked in 2022. With Chevron and its leading peers seeing price levels moving back to mid-cycle zones, Chevron needs to pursue higher margin opportunities in upstream. Accordingly, the company anticipates that the “returns in the upstream sector are likely to be structurally higher than in the downstream.”

I gleaned that the energy markets have struggled for momentum lately, particularly in crude oil (CL1:COM) (CO1:COM). As a result, WTI crude remains close to the low $70 level, which it last saw in June 2023. Saudi Arabia’s recent decision to “reduce the selling price of its flagship Arab Light crude” to Asian customers was attributed to this week’s volatility. However, WTI crude buyers have not given up the critical $70 support level convincingly, underscoring my observation that crude oil remains firmly in a medium-term uptrend.

Furthermore, Chevron’s ability to drive production growth should mitigate medium-term volatility in the energy markets. Chevron also expects to maintain its robust capital allocation policies with the range of $10B to $20B for share repurchases. Management stressed that “Chevron can sustain these repurchases in a lower price environment.”

With CVX trading at a forward EBITDA multiple of 5.6x, it isn’t priced at a premium to the broad market. However, Chevron’s market leadership suggests it’s trading at a premium against its peers, with a valuation grade of “D+.” As a result, the market likely expects Chevron to continue executing well to deserve its relative premium. However, with the recent de-rating as it bottomed out in November 2023 at the $140 level, could the worst be over?

CVX’s long-term price action suggests an uptrend continuation structure, predicated on the bear trap (false downside breakdown) at its November 2023 lows.

Therefore, I don’t quite understand why investors who don’t assess investor psychology as a fundamental aspect of their analytical framework were so concerned with the Guyana challenges. I believe management has already considered the political uncertainties, given the involvement of Exxon and China National Offshore Oil Corporation or CNOOC.

CVX’s buying sentiments over the past two months corroborate that the fears were overstated, as the uptrend continuation remains intact.

As a result, I remain bullish on CVX and view the recent weakness as a fantastic opportunity for investors to benefit from the cyclical recovery of CVX as it moves into its mid-cycle phase.

Rating: Maintain Buy.

Important note: Investors are reminded to do their due diligence and not rely on the information provided as financial advice. Please always apply independent thinking and note that the rating is not intended to time a specific entry/exit at the point of writing unless otherwise specified.

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Have constructive commentary to improve our thesis? Spotted a critical gap in our view? Saw something important that we didn’t? Agree or disagree? Comment below with the aim of helping everyone in the community to learn better!

Analyst’s Disclosure: I/we have a beneficial long position in the shares of XOM either through stock ownership, options, or other derivatives. 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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• The Energy sector has the highest combined dividend yield and buyback yield at 8.0% as of December 31, 2023, and Chevron now sports a 4% dividend yield.
• Chevron is undervalued, in my view, and has a strong management team focused on delivering shareholder value.
• With oil prices in the mid-$70s, about $30 above its breakeven price, stock price momentum remains soft.
• I outline key price points to monitor ahead of Q4 earnings due out in early February.

Looking for value and yield in 2024? The Energy sector continues to sport strong shareholder yield. Each month I review the JPMorgan Guide to the Markets, and there is a particular chart that should catch the eye of investors. The area of the market with the highest combined dividend yield and buyback yield is far and away the Energy sector at 8.0% as of December 31, 2023.

I have a buy rating on Chevron Corporation (NYSE:CVX). I see shares as undervalued while its management team continues to put the shareholder front and center.

Energy Sector Sports an 8.0% Total Shareholder Yield

According to Bank of America Global Research, CVX is a US-based integrated oil and gas company, with worldwide operations in exploration and production, refining and marketing, transportation, and petrochemicals. In E&P, operations are globally distributed, including North and South America, Africa, Asia, and Europe.

The California-based $283 billion market cap Integrated Oil and Gas industry company within the Energy sector trades at a low 11.3 forward 12-month operating price-to-earnings ratio and pays a high 4.0% dividend yield, according to Seeking Alpha. Ahead of earnings due out in early February, the stock has a low 23% implied volatility percentage and carries a modest 2.1% short interest, up from about 1% last summer.

Back in October, Chevron reported a mixed third quarter. Non-GAAP EPS of $3.05 fell short of the Wall Street consensus of $3.69, though top-line results were better than expected – revenue of $54.1 billion, down 19% from year-ago levels, was an impressive $1.1 billion beat. The company made an acquisition that helped drive worldwide net oil-equivalent production higher by 4% versus the same quarter in 2022.

The bottom-line miss was due primarily to weakness in the US refining market, and downstream earnings for CVX took a hit as a result. Lower oil and gas prices during the period and some troubles related to the PDC merger were headwinds. LNG prices globally were also much weaker compared to the middle of 2022. Overall cash flow of $8.9 billion was seen as a light number, too, and while the firm was still buying back shares, the pace of share repurchases slowed.

For 2024, the management team expects total spending of about $19 billion, with $16 billion in capex, and strong dividend payouts considering a Brent oil breakeven price near $45 per barrel. Its acquisition of Hess should help free cash flow in the out years. The recent $4 impairment news should not be a major issue going forward as it appears to be a one-time event, and the stock didn’t react very much to the news.

Key risks include lower oil and gas prices, as well as high volatility in commodity pricing, poor execution on new projects and recent M&A moves, troubles with its capex plans, and additional adverse regulatory announcements.

On valuation, analysts at BofA see earnings having fallen sharply in 2023 following 2022’s year of abnormally high oil and gas prices. Per-share profits are expected to rise this year, though the current consensus outlook, per Seeking Alpha, shows just mid single-digit year-on-year EPS growth for the current year. Top-line growth trends are likewise lackluster – flat this year and down 5% in 2025.

Dividends, meanwhile, are forecast to rise at a steady pace over the next several quarters while free cash flow turns better by the out year. With an EV/EBITDA multiple less than half that of the broad market, shares appear cheap.

Chevron: Earnings, Valuation, Dividend Yield, Free Cash Flow Forecasts

If we assume $14 of normalized non-GAAP EPS and apply the stock’s 5-year trailing earnings multiple of 13.5, then CVX should trade near $189, making it significantly undervalued today. Moreover, you must consider that the Energy sector as a whole sells at the cheapest P/E of any sector, so the group is likely a value play this year on an absolute basis.

CVX: Mixed Valuation Metrics, Strong 4% Yield

Compared to its peers, CVX features a somewhat poor valuation grade as you can find some single-digit P/E integrateds, particularly overseas in Europe. I assert that those could be even better value candidates, so long as they have ample free cash flow trends and engage in shareholder-friendly activities.

For Chevron, its growth trajectory is not all that impressive, but if oil prices hang in the $70-$80 per barrel range, the profits should still be decent. What’s more, CVX has very strong profitability trends amid very weak share-price momentum which I will detail later in the article. Finally, EPS revisions show 16 downward revisions to only six upward revisions in the last 90 days – the recent impairment news hopefully puts some bad news behind the company.

Competitor Analysis

Looking ahead, corporate event data provided by Wall Street Horizon shows a confirmed Q4 2023 earnings date of Friday, February 2, before the open with a conference call later that morning. You can listen live here. No other catalysts are seen on the calendar.

Corporate Event Risk Calendar

The Technical Take

Since I last reported on Chevron, the stock has not done a whole lot. Notice in the chart below that shares fell under support at the $150 mark, dropping to next support at the September 2022 low of $140. The bulls managed to bring CVX back above $150, and it’s hanging there now while oil prices oscillate in the low to mid $70s. With a high amount of volume by price in the current zone, it may be an ongoing choppy trade until the stock can rally through a downtrend resistance line currently near $165.

Also take a look at the long-term 200-day moving average – it is negatively sloped, suggesting that the bears are in control. Also, shares are below that key moving average and the 50dma is below the 200-day, too. But with decent RSI momentum, seen at the top of the graph, there has been some improvement in momentum over recent weeks. Longer-term, the double top from March last year and this past September, near $172, is another possible area of selling, below the all-time high of $190 notched in late 2022.

Overall, it is trendless price action in Chevron, and the stock has been a relative laggard over the past year.

CVX: Shares Bouncing Around $150, Neutral Technical Signs

The Bottom Line

I reiterate my buy rating on Chevron. While the momentum and technical situations are not ideal if you are a bull, its valuation is attractive, and the company continues to generate strong free cash flow with dividends and buybacks.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Chevron: Shareholder-Friendly Moves, Big Free Cash Flow Seen In 2024 appeared first on Up2info.com.

• A list of high-quality dividend growth stocks is identified based on proximity to 52-week lows.
• Pfizer, Bristol-Myers Squibb, and ResMed appear attractively valued based on Future and Historical fair valuations.
• Chevron appears to be a good investment opportunity due to its high quality and sustainable dividend, however, there are risks to be aware of.

Introduction and Background

In my last article, I was excited about the number of investments that I had been able to make based on attractive valuations. With the rally over the last couple of months, I have been finding it harder to identify those same attractive opportunities and have mostly been sitting on the sidelines (though the rally does make me feel like a better investor than I probably am). I did add to positions in Pfizer (PFE) and Cisco (CSCO) in November, as well as Hershey (HSY) in December, but otherwise, I’ve been keeping the powder dry until valuations look more attractive. That doesn’t mean that I’m not regularly updating the valuations of the 100 or so high-quality dividend growth stocks that I monitor in my watchlist to make sure I don’t miss the opportunity.

If you’ve been following along, you know that one of my favorite ways to look for value in this high-quality dividend growth space is to screen for those stocks trading near 52-week lows. For this exercise, I decided to filter my watchlist by companies that are trading at less than 33% of their 52-week range (52-week low being 0% and 52-week high being 100%).

Using this first pass criteria, we will be looking at the following list of companies:

Fair Value Estimation

As I’ve described in previous articles, I like to calculate a fair value in two ways, using a Historical fair value estimation, and a Future fair value estimation. The Historical Fair Value is simply based on historical valuations. I compare 5-year average: dividend yield, P/E ratio, Schiller P/E ratio, P/Book, and P/FCF to the current values and calculate a composite value based on the historical averages. This gives an estimate of the value assuming the stock continues to perform as it has historically. I also want to understand how the stock is likely to perform in the future so I utilize the FinBox fair value calculated from their modeling, a Cap10 valuation model, FCF Payback Time valuation model, and a 10-year earnings rate of return valuation model to determine a composite Future Fair Value estimate.

I also gather a composite target price from multiple analysts including Reuters, Morningstar, Value Line, FinBox, Morgan Stanley, and Argus. I like to see how the current price compares to analyst estimates as another data point, and as somewhat of a sanity check to my own estimates.

Plotting three variables on one plot is tricky but using a bubble plot allows us to visualize three variables by plotting the Historical fair value versus the Future Fair Value on a standard x-y chart, and then use bubbles to represent the size of discount relative to analyst estimates.

This chart is insightful once you understand how to interpret it. What we are looking for are stocks that are trading at a discount to both the Historical Fair Value and the Future Fair Value. So, those stocks that are farther to the left, and farther to the bottom, are potentially the stocks trading at the largest discount to fair value. This would be the bottom left quadrant of the graph. Additionally, those stocks with the biggest bubbles are the stocks that are trading at the largest discount to analyst estimates, so in theory, stocks in the lower left quadrant that also have large bubbles, should be very decent candidates for investment.

The chart suggests that Pfizer (PFE), Bristol-Myers Squibb (BMY), and ResMed (RMD) are attractively valued from a Historical and Future Fair Value perspective. It also suggests that Nike (NKE), and Chevron (NYSE:CVX) are also below Historical Fair Value, while being close to Future Fair Value.

I currently own all five of these stocks and believe that each could be an excellent candidate for further investigation, and potential investment, especially for long-term investors.

As a matter of fact, my more recent articles cover several of these, and I refer you to them for further investigation, since I still believe they are relevant. PFE’s is here, BMY’s is here, and NKE’s is here.

One thing you can be sure of if you are reading my articles, I buy what I write about. As I stated above, I added to my position in PFE right after I published my article on it in November. I also added to my positions in BMY and RMD in October, and NKE in September. I’ve been watching CVX again but haven’t invested more since March. My cost basis is pretty low in CVX, and I worry about oil prices, the economy, geopolitical influences, and the future of carbon. Having said that, with a lack of other attractive ideas, I thought I’d do a deeper dive to help firm up my decision on whether to buy more CVX.

Chevron Preliminary Analysis

I like to start simple when analyzing companies. CVX has a 5-year average Return on Equity of 9% and Return on Invested Capital of 6.3%. These, frankly, are not great numbers, and are below my thresholds for investment for most companies. However, CVX, and other energy companies had some really challenging years that bring the 5-year average down. The most recent results are 16% for RoE and a little over 11% for ROIC. These are at the lower end of my limits but demonstrate improvement potential. The weighted average cost of capital for CVX is around 9.5%, which compared to the ROIC doesn’t offer much margin for growth. Morningstar’s Narrow Moat rating suggests what we probably all know, which is this is an attractive, but competitive industry, however the Exemplary Capital Allocation rating suggests CVX is doing well within the industry. CVX is currently 3-star rated at Morningstar, though it’s close to the 4-star value, suggesting it is likely on the slightly favorable side of fair value, which aligns well with my valuation.

Now, looking at the dividend, CVX’s 45% Earnings-based payout ratio and 56% Free Cash Flow-based payout ratios are good, and offer the margin I like to see for an investment that I know can be pretty cyclical. The 5-year dividend growth rate of around 6% is a little lower than I like, but the starting yield of 4% coupled with the low payout ratios is good. My estimated future growth rate for CVX is below the dividend growth rate, which is something that concerns me, though I know CVX has plans to improve the growth story moving forward (though who doesn’t).

One more source I like to check is the Seeking Alpha Factor Grades. Though these tend to be more short-term in focus than my investment horizon, I consider the grades as a guide of what to look for in answering the question of whether the valuation may be due to shorter term issues, or more systemic.

The challenge with the factor grades is that they are relative to the rest of the sector, and this is a sector with some current, and especially, past challenges. Within the sector, CVX is arguably one of the higher quality companies manifest by the Profitability factor, so perhaps accepting a poor relative valuation is part of the price of the relative quality. Growth, as mentioned, hasn’t been, and unfortunately, does not look to be particularly strong, and Momentum is a challenge due to many of the unique risks CVX has right now.

Chevron Historical Valuation Analysis

I always like to start my historical assessment of a stock with a look at performance compared to the S&P500 and relevant peers over the past. This isn’t particularly useful by itself, but can provide an indication of potential, as well as sentiment. I decided to throw XOM, SHEL, and BP onto the chart for obvious comparison.

With oil prices as low as they were for several years, it is no surprise that this sector underperformed the broader market during that period, as profits and cashflows were challenged. However, also of note is the investment potential that exists when oil prices are higher, as CVX and XOM were able to catch up with the broader market. The recent divergence of CVX and XOM is interesting, given the very similar levels of performance historically. That likely comes back to some of the current risks that are unique to CVX.

From a historical comparison perspective, two of the fundamentals I like to investigate are historic P/E and yield. Low P/Es relative to history, coupled with high yields compared to history can often indicate attractive valuation, assuming the underlying business is sound.

CVX’s average P/E chart shows that it may be just under fair value relative to its 5-year average of around 11.9. The chart also shows the depth of the cycle when oil prices are too low to support the cost of capital. Hence, the need to ensure a healthy margin of safety.

From a yield perspective, CVX is quite a bit lower than the 5-year average of 5.1%. Obviously, in retrospect, when the profitability and cash flows looked so scary, that would have been an excellent time to buy. Relative to more recent history, and relative to what is readily available for other high quality dividend investments, the 4% current yield is reasonably attractive.

A key part of the Total Shareholder Return includes stock buybacks, which are also important to dividend growth sustainability. Over 5 years, the number of shares outstanding is down, however, it has been bumpy. On the other hand, for my dividend investments, if the company also regularly buys back shares, I view that as an extra margin of safety, since most companies will likely pull back on buy backs prior to sacrificing the dividend, as long as dilution doesn’t get out of hand.

Comparing revenue to net debt, we can see why CVX has such a strong credit rating. Obviously during COVID and the times of low oil prices, debt did come up, but as soon as the revenues and profits rebounded, the debt was paid back down. The percentage of debt as a function of revenue is very manageable. Low debt is something I also love to see in my dividend payers.

CVX has been paying a growing dividend for a long time – 36 years. They have done so while enduring a lot of ups and downs. The 5-year average growth is around 6%, and obviously changes depending on how the company is doing. I do appreciate the overall stability and consistency.

Dividend growth doesn’t do any good if the growth is not sustainable. The chart of the earnings and free-cash-flow-based payout ratios show the cyclicality and recent challenges as well as any. During COVID and when the oil prices were low, the payout ratios got unsustainably high, contributing to the growth in debt we saw above. However, when times are good, the payout ratios look very attractive. As we’ve already stated, this gives us a feel for how much safety margin this company requires to weather the downturns.

CVX understands the need for resiliency, and the importance of the dividend. As we’ve discussed, they’ve been paying a growing dividend for 36 years, through many different business challenges. It is good to see in their October 2023 Investor Presentation that they are playing through these scenarios as a course of business. We can see what will happen in downside and upside scenarios, both of which show strong dividend sustainability. No surprise, in the downside, share buybacks pull back, as well as some small decreases in Capex, but the business investment is still healthy.

Chevron Future Valuation Analysis

Because we want our dividends to grow in the future, not just the past, we need confidence that CVX is on a sustainable path that can weather the cycles inherent to the business.

Looking at future Earnings Per Share projections, CVX does have some warning signs that make me wonder if now is the best time to invest. Earnings per share are projected to fall for the next few years. Management is aware of this challenge and is putting in place investments and strategies to overcome this, however, at this point, this is clearly a warning sign.

Growth is so important, yet also so hard to predict. Though we are thinking about the future in this section, I like to look at the history of growth forecasts to see how they align with the future predictions. We can see that analysts have been all over the place on the growth predictions. Drawing an average through it, we come out with something that looks like low, single-digit growth predictions.

My own estimate for CVX’s forward growth is around 3%. I derive this from a combination of various growth projections and growth models. I personally feel like an average, mid-single digit growth expectation is reasonable for CVX, with some big swings along the way.

For a dividend growth investor, understanding future dividend growth potential is also important, especially in as much as it is sustainable. Here are the long-term dividend growth projections for CVX. Perhaps no big surprise, given the relative consistency in dividend growth, even during the storms, the predictions are for that same consistency to continue.

To add to the comfort of the predicted future increases in dividends is the projected payout ratios. With the low projected growth and EPS headwinds that are anticipated, it is no surprise to see that the payout ratios are forecast to increase. This is something we will need to keep an eye on. It is also something that makes me wonder if the projections aren’t a bit pessimistic right now, given some of the current challenges.

Just to be explicit, the increase in earnings-based payout ratio aligns with a decline in revenue that is forecast. If true, that is a significant decline, and suggests that the current valuation is likely not attractive.

To balance that perspective though, CVX believes strongly in their ability to continue to generate growing, and attractive free cash flow, even at relatively conservative oil prices. They are projecting at least 10% average free cash flow growth.

Chevron Risk

CVX is a high-quality company that is one of the best in class in a very cyclical industry. The S&P credit rating of AA-, Moody’s credit rating of Aa2, and A Value Line Financial Strength rating all attest to the quality of this company.

However, the risks are considerable – with a few that worry me listed below.

First, CVX operates in a challenging industry that is very sensitive to the price of oil. With the growth of low-cost production coming out of the shale regions, this helps increase the buffer of pricing impacts, and also provides margin, however this is still something to consider. The weakness in profit and cashflow during the recent spell of low prices definitely shows the business sensitivity.

Second, CVX may be challenged by the energy transition. Now, the company is investing heavily in carbon capture technologies, as well as biofuels, while also reducing the carbon intensity of current production through methane controls. There is also the argument for the need for oil-based energy to keep up with world-wide energy demand growth. I personally believe this argument and think that CVX is on the right path to profitably invest in various carbon reduction technologies, close to their core business. One more potential future energy transition business idea I like is producing lithium as a potential byproduct of other operations. Their recent 2023 Climate Change Resilience Report does a nice job laying out a balanced, but obviously, CVX centric view of the future. Just a couple charts that I like from the report that lay out the challenges in meeting future energy demands from a global perspective, as well as from a physics perspective. Hydrocarbons are hard to replace, so I like that CVX is more pragmatic in using them in a more sustainable way.

Third, CVX has real business and geopolitical risks. Reference the recent write-downs ($3.5-$4B) that they had to take due to the regulatory environment in California, and being accountable for abandonment and decommissioning of assets in the Gulf of Mexico when the company they sold those assets to declared bankruptcy. Also, it will be interesting to see how the conflict in Guyana impacts the expected acquisition of Hess. These are examples of the types of risks that make investing in a company like CVX in an industry that is not exactly in favor, worrisome, which is again, why I like seeing the view of the future that management has laid out, which strikes a nice balance between the realities of future environmental concerns, business risks, and future energy needs.

Moving away from the scary risks, I also like further confirmation of what we’ve already established as far as dividend growth and sustainability are concerned, and Seeking Alpha’s Dividend Grades support solid dividend safety. I do think it’s funny in the current investment environment that a yield of 4% only gets you a C-, but again, that is relative to its sector peers, which I believe do not bring the same level of quality.

As a final check of risk, I like to look at short-term risk indicators for any new investments, with Short Interest being one key indicator for me that I might be missing something that others might know.

Based on the low short interest, I don’t see any short-term red flags that haven’t been discussed.

Summary

I am going to do something that I hate to do in my articles and suggest a hold. I believe, based on the uncertainty with the Hess acquisition, the recent write-downs, and with the unfavorable future revenue and growth projections that I want to wait until CVX is closer to the true 52-week lows. I don’t plan to reconsider until CVX falls to at least $144, which isn’t that far, but may wait for the next earnings refresh to get some more color on the current risks before adding more. $144 is where my margin of safety against my valuations starts to look attractive and is also around the floor for the most recent lows. I already have a significant holding in CVX, which I do not plan to sell, so a hold recommendation seems prudent.

Having said that, I went back and forth between the strong side of hold and the weak side of buy. CVX is rated as a buy by my fellow SA Analysts, as well as by the broader Wall Street contingent. Long-term, and given the dividend yield, I feel confident this is a good investment.

As part of this analysis, I also highlighted PFE, BMY, and RMD as being attractively valued from a Historical and Future Fair Value perspective, and worthy of further investigation. Please see the Fair Valuation Estimation section for links to recent articles on PFE and BMY that I believe are still representative.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of BMY, CTVA, CVX, HSY, NKE, PFE, RMD, XOM either through stock ownership, options, or other derivatives. 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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post High-Quality Dividend Growth Near 52-Week Lows: Chevron Is Shaping Up appeared first on Up2info.com.

• President Maduro of Venezuela escalates tensions with Guyana, claiming Venezuela’s right to defend itself and its interests.
• The discovery of 11Bboe in the Stabroek block may be a motive for President Maduro to nationalize the block, putting Exxon, Chevron, and Hess at risk.
• Economic growth in Guyana, driven by the oil discovery, has led to increased infrastructure development and investment in the country.

Disclaimer: I’m not a geopolitical expert and this is all speculation on my part. The information presented is merely an exercise of thought and should be taken with a grain of salt. All opinions expressed are my own based on news releases that may or may not encompass all material information relating to the matter.

President Maduro of Venezuela appeared to further escalated the situation in Guyana, claiming that:

Venezuela has the right to defend itself, to tranquility, to peace.

President Maduro

In retaliation to the British military sending Guyana a warship, President Maduro deployed 5,000 troops to Guyana as tensions rise between the two nations. Though many would suggest this is just a border dispute, I strongly believe this is the result of the 11Bboe find in the Stabroek block and President Maduro fully intends on nationalizing this block. This can have huge implications for Exxon (XOM) directly and Chevron (NYSE:CVX) and its acquisition of Hess (NYSE:HES). I have covered both Exxon/Pioneer Natural Resources (PXD) and Chevron/Hess relating to the initial referendum and what could be the result of an invasion. Seeking that, talks have turned into deployment; I believe the tipping point is imminent. I believe any escalation in the region will put Chevron’s acquisition of Hess at risk given the firm’s 30% stake in the assets. I had originally reported an optimistic viewpoint that the border talks wouldn’t escalate. Given the recent update over the holidays, I am gradually becoming more concerned that escalation may occur, resulting in the deal being called off. I am downgrading my recommendation on HES to a SELL and maintain my SELL recommendation for Chevron, maintaining my price target of $136/share for CVX. As discerned in my initial report covering Exxon & Pioneer Natural Resources, I remain bullish on the firm and the deal in place. I will maintain my BUY recommendation for XOM & PXD with a price target of $107.55/share for XOM.

Operating Overview

Exxon has made over 25 significant discoveries offshore Guyana in the Stabroek, Canje, and Kaieteur Blocks. With the recent completion of Payara, total production in the Stabroek Block now sits at 620Mboe/d. The Stabroek Block’s equity ownership includes Exxon at 45%, Hess at 30%, and China’s CNOOC Nexen Petroleum at the remaining 25%. Overall, Exxon anticipates to nearly double production to 1.2MMboe/d by 2027.

Aside from the oil play, Exxon claims that contractors have spent more than $83b with more than 1,500 Guyanese businesses in 2022 alone and $180b since 2015. Not only is the oil discovery beneficial to the global energy economy, it has strongly benefited the local economy of Guyana that has supercharged their economic development. Accordingly, GDP forecasts, for the small nation of 800,000 people, grew by 62.3% in 2022, is projected to have grown 38% in 2023, and will grow an additional 115% over the next 5 years.

According to Guyana Chronicle,

The 2023 budget saw massive increases in funds for key infrastructural upgrades, such as roads and bridges, housing, and power generation.

Guyana Chronicle

The article goes on to suggest the budget increased from $11.8b in 2019 to $131.5b in 2023 for infrastructure development. $53.1b will be spent on housing development alone. The sudden influx of money has also driven the hospitality sector with a surge in internationally branded hotels being constructed around the nation’s capital, Georgetown. I believe much of this economic growth is what drove President Maduro to pay a special interest to the small nation.

As I had previously covered in my report on Chevron/Hess, Guyana accounts for nearly 40% of Hess’s total production for q3’23. In the article, I had suggested that any escalation may hinder the $53b deal as I believe the primary target of Chevron isn’t necessarily Hess’s domestic assets. Given the recent escalation in Guyana, I have reason to believe that this isn’t going to end anytime soon and may escalate into an invasion. I strongly believe that if the situation were to escalate in Guyana and if the US backsteps from Chevron’s ability to produce with Venezuela, the acquisition of Hess will be at risk.

On the flipside, if the skirmish were to deescalate, I do believe the deal, though relatively expensive per the offered valuation, will strongly benefit Chevron. Guyana, along with the short-cycle domestic assets, will offer Chevron a wide range of production flexibility and will be margin accretive.

Valuation

Though the geopolitical risk doesn’t necessarily mean a loss of assets, I do believe it is worth considering as a very real possibility and how it may affect both the firm itself and the deal that’s at stake. Without the Guyana assets, I believe HES’s valuation would look closer to 16.52x EV/EBITDA at its current price. If Hess were to lose their Guyana assets and if Chevron were to either pull out of the deal or adjust their price, I believe HES shares would be worth closer to $79.42/share, a -45% downside risk to the current price level.

Given HES’s robust valuation, I believe the firm’s shares will be at greatest risk if production were to but cut off at the Stabroek block and if the deal with Chevron were to falter. One cannot know for certain if this will occur; however, I’m suggesting this as a potential hazard as the geopolitical risks in the region develop.

To reiterate, I provide XOM/PXD a BUY recommendation with a price target of $107.55/share for XOM with no price target provided for PXD as shares will trace XOM upon closing, and CVX/HES SELL recommendations with a price target of $136/share for CVX with no price target for HES for the same reason as PXD.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of XOM either through stock ownership, options, or other derivatives. 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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Chevron And Hess Merger May Be At Risk As Geopolitical Risk Escalates appeared first on Up2info.com.

• As a Dividend Aristocrat, Chevron could fit well with my goal of building a sustainable and growing stream of passive income.
• The company’s capex and acquisitions should drive healthy growth in the future.
• Chevron’s modest leverage and industry leadership earn it an AA- credit rating from S&P on a stable outlook.
• The supermajor appears to be trading at a 6% discount to fair value.
• Chevron could double the S&P in the next two years and outperform by as wide of a margin over the coming 10 years.

My primary objective as an investor is to build a viable and rising stream of passive income. Why dividend growth investing?

The idea is that this approach will hopefully help me meet/exceed my monthly expenses through passive income. At that point, I will be free to keep doing what I currently am doing without worrying about money as much.

I also figure that if my portfolio produces ever higher amounts of passive income, capital appreciation will also eventually follow. That would be the cherry on top of the fudge sundae in my opinion.

How do I plan on reaching the promised land of investing? There’s the all-important living below my means aspect. By American standards, my tastes are probably among the simplest out there. Beyond the essentials that we all take for granted and an internet connection, I don’t need or want much.

That allows me to steadily build up capital for investing, which raises the next question: What do I do with it? I aim to load up my portfolio with the most qualitative, proven businesses on the planet.

Chevron (NYSE:CVX) is a Buffett-owned business that I have had on my watch list for years now, but I have never pulled the trigger. When I stop aggressively building up my emergency fund and resume investing (likely in February 2024), I hope to add Chevron at some point next year. Please allow me to unpack the company’s fundamentals and valuation to explain why.

Chevron’s 4% dividend yield is currently about 10 basis points higher than the 3.9% yield of the 10-year U.S. treasury. Not to mention that it is nearly triple the 1.5% yield of the S&P 500 (SP500). Suffice it to say, that Chevron’s dividend is competitive in even a high rate environment such as this one.

Better yet, the company’s payout appears to be rather safe. For one, the 30% EPS payout ratio is well below the 40% EPS payout ratio that rating agencies consider safe for Chevron’s industry.

Additionally, the company’s 13% debt-to-capital ratio clocks in at less than half of the 30% industry safe guideline put forth by rating agencies. Thanks to this low payout ratio and modest debt load, Chevron is rated AA- on a stable outlook by S&P. For context, that’s just three notches below a perfect corporate credit rating. That implies the probability of Chevron going to zero over the next 30 years is just 0.55%.

Due to these nearly impeccable fundamentals, Dividend Kings pegs the risk of the company cutting its dividend in the next average recession at only 0.5%. This is the lowest allowed probability for Dividend Kings’ dividend cut risk metric. The chance of a dividend cut in the next severe recession remains low at just 1.5%. That’s only a touch more than the absolute minimum dividend cut risk of 1% for a severe recession for even the most reliable dividend payers.

Chevron is an excellent business, which also looks to be undervalued. Using historical valuation metrics such as dividend yield, Dividend Kings estimates that shares of the supermajor are worth $161 each. Relative to the current $152 share price (as of December 20, 2023), this would represent a 6% discount to fair value.

If Chevron matches the growth consensus and its valuation reverts to fair value, here are the total returns that it could deliver to shareholders in the coming 10 years:

• 4% yield + 8.3% FactSet Research annual earnings growth consensus + a 0.6% annual valuation multiple expansion = 12.9% annual total return potential or a 236% cumulative 10-year total return versus the 8.6% annual total return of the S&P or a 128% cumulative 10-year total return

Chevron Is Positioning Itself For The Future

Considering the circumstances, Chevron’s third quarter ended September 30 was decent. The company’s total revenue of $54.1 billion was down by 18.8% year-over-year, but this did beat the analyst consensus by $1.1 billion.

It would only make sense that Chevron’s total revenue was lower by as much as it was in the third quarter. As the illustration above demonstrates, energy prices have largely trended down and to the right over the last year and change. For example, West Texas Intermediate crude oil averaged $95 a barrel throughout 2022, peaking around the summer (the year-ago period for Q3 2023). Now, WTI crude oil is around $75 a barrel. The same was true for natural gas spot prices, peaking in Summer 2022 at roughly $9. That made for a difficult comparison period for Chevron.

Unsurprisingly, the company’s non-GAAP EPS of $3.05 during the third quarter was 45.1% lower than the year-ago period. This missed the analyst consensus by $0.64.

However, it wasn’t all bad news for Chevron. Most prominently, the company upped its net oil-equivalent production by 4% over Q3 2022 to over 3.1 million barrels daily. This was fueled by the $7.6 billion acquisition of PDC Energy earlier this year.

Global natural gas production was relatively flat. That’s encouraging, given the drop in natural gas prices was much more precipitous than in WTI crude oil.

Chevron’s 3% compound annual growth rate target in production through 2027 also isn’t just for the sake of upping production (slide 8 of 55 of Chevron’s October 2023 Investor Presentation). The company’s return on capital employed was above 12% for the ninth consecutive quarter. Such an ROCE figure in a volatile industry in which Chevron operates shows that the company has historically been a prudent steward of capital. This alone is part of why I give the company the benefit of the doubt on the acquisition of Hess Corp. (HES). For a more in-depth explanation of why it could be a smart move, I would refer readers to Michael Fitzsimmons’ recent article on the acquisition.

Chevron also remains a financial fortress. The company’s interest coverage ratio through the first nine months of 2023 was a whopping 75.8. Operating in an unpredictable industry, this is a robust interest coverage ratio that can service Chevron’s debt in just about any operating environment.

Free Cash Flow Can Support Solid Dividend Growth

Chevron has upped its dividend for 36 consecutive years, which comfortably earns it the distinction of being a Dividend Aristocrat. In just the last five years, the company’s quarterly dividend per share has surged 34.8% higher to the current rate of $1.51. That’s good enough for a 6.2% compound annual growth rate.

Chevron also looks like it has many more years of dividend growth left in the tank. This is because the company generated $11.7 billion in free cash flow through the first nine months of 2023. That’s even with a $3 billion-plus uptick in capital expenditures to $11.5 billion over the year-ago period. Against the $8.5 billion in dividends paid over that time, this suggests Chevron’s dividend is secure (details sourced from page 7 of 163 of Chevron’s most recent 10-Q filing).

Risks To Consider

Chevron is a world-class business. However, the company has risks that should be considered by investors.

The company should have the next few decades to pivot to being an alternative energy business. Chevron’s $8 billion in forecasted lower carbon investments and $2 billion in carbon reduction projects through 2027 will be a good start to the goal of leading energy into the future. But it’s important to note there are no guarantees that these investments will pay off. If Chevron can’t successfully transition toward the future of energy, its fundamentals could deteriorate and the investment thesis could break.

Another risk to Chevron is the magnitude of its $60 billion deal for Hess. Studies have shown that the majority of M&A activity destroys shareholder value. Chevron has proven itself to be exceptional at creating value for shareholders, but that doesn’t exempt it from the possibility of executing a failed acquisition.

Finally, investors must be comfortable with the cyclical nature of Chevron’s business. If somebody is going to own the business, they must be able to live with the peaks and troughs that arise in its operating and financial results.

Summary: A Warren Buffett Favorite At A Discount

Chevron is a growing business with a conservative balance sheet that’s committed to shareholders. Although Berkshire Hathaway (BRK.B) has been trimming its position of late, the supermajor remains the company’s fifth-largest holding, valued at $16.8 billion.

Chevron’s blended P/OCF ratio of 7.9 is just a bit more than the historical P/OCF ratio of 7.7 per FAST Graphs. If the company grows as anticipated and falls to its average valuation multiple, cumulative total returns could be 25% through 2025. That’s nearly twice as much as the 13% cumulative total returns that the SPDR S&P 500 ETF Trust (SPY) is expected to generate through 2025. This is why I believe shares of Chevron are a buy right now.

Analyst’s Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. 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.

Seeking Alpha’s Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

The post Chevron: Fill Up The Income Tank And Buy This 4%-Yielding Dividend Aristocrat appeared first on Up2info.com.