CVX Stock: Is Chevron Corporation’s Dividend Safe?
CVX Stock: Collect 4% Dividend Yield From This Top Oil Company
When it comes to paying dividends, you can’t beat energy companies. Consider Chevron Corporation (NYSE:CVX) stock, which is yielding over four percent in an environment where oil prices remain depressed and there is a need to preserve cash.
Currently, there are just under 40 companies that yield more than four percent in the S&P 500. In this shrinking space for higher income opportunities, S&P 500 companies are yielding just two percent on average.
Chevron’s strategy of not cutting its dividend seems counterintuitive at a time when oil prices are in a cyclical downturn, causing huge losses to oil majors, which saw their earnings plunge over the past two years, forcing them to cut spending to save money wherever they can. Some companies, including Chevron, have refused to chop dividends.
For those companies, dividends are one of the most important hooks to attract new investors and keep the current ones happy. Oil majors know that everyone is desperate to find opportunities for higher returns as interest rates remain near record lows.
After increasing its dividend for 24 years in a row, Chevron has maintained its quarterly dividend at $1.07 per share since the second quarter of 2014, when the commodity rout really started to hit its ability to generate cash flows.
For investors in CVX stock, the news on the earnings front has also been very disappointing. Chevron has experienced a steep decline in earnings per share in the most recent quarter, in comparison to its performance from the same quarter a year ago. During the past fiscal year, Chevron reported lower earnings of $2.45, down from $10.14 in the same period the year prior.
Chevron Stock: Diversified Business Model Providing a Hedge
Let’s analyze what’s keeping Chevron stock strong and why many observers believe the company will maintain its dividend in the third quarter.
Chevron is the second-largest global oil producer behind Exxon Mobil Corporation (NYSE:XOM) with a $191.0-billion market capitalization. Chevron is an integrated energy company with a separate chemical business, operating both upstream and downstream.
Chevron’s biggest strength is its diversified business model, which is a hedge against falling oil prices. Even though the company loses money on production of oil and gas, its refining and marketing of energy products and manufacturing of commodity petrochemicals can still generate cash to pay for its dividends.
For example, in the second quarter, Chevron lost $2.46 billion from its upstream businesses, but made $1.278 billion from downstream activities. The company has remained competitive by undertaking some aggressive cost-cutting measures, leaving unprofitable markets and streamlining its various business units. In order to get the cash balance, Chevron slashed $6.0 billion from its operating and capital spending in the first six months of this year. (Source: “Chevron Reports Second Quarter Loss of $1.5 Billion,” Chevron Corporation, July 29, 2016.)
Due to this strength in the company’s business model, investors are willing to pay much more premium for CVX stock when compared to other super-major peers, including ExxonMobile. Chevron stock has responded more positively to the recent oil-price rally, rising more than 13% in the past one year, which compares to Exxon’s nine percent gains in that same time period.
Final Word on CVX Stock
The latest good news for Chevron stock investors is that there are indications that oil-producing countries have agreed to cut production to balance the oversupplied oil markets. Oil has jumped more than 13% in the past two weeks, since the Organization of the Petroleum Exporting Countries (OPEC) proposed its first production cuts since 2008.
I believe that Chevron’s management has seen many oil boom and bust cycles, and they seem committed to sparing cash to pay for dividends. If you’re an income investor, I don’t think this is the right time to exit this trade, especially at a time when the oil markets are rebounding and the upside potential for CVX stock is much greater when compared to other companies in this space.