Chevron's (CVX, Financial) stock has performed stunningly during the past few years as its financial strength allowed it to take advantage of higher oil and gas prices to leverage its profitability. However, with the stock market being cyclical, many investors might be wondering whether Chevron's future prospects are still intact.
Although there's no simple answer to that question, I believe Chevron can sustain its momentum and even transform into a high-quality, high-dividend play soon instead of resuming its trajectory as a value stock; here's why.
Key drivers
Earlier this month, Chevron delivered a positive report at Bernstein's 38th strategic decisions conference. According to the report, the company anticipates 700 to 750 thousand barrels of oil equivalent per day to be produced from its Permian basin upstream operations. Furthermore, Chevron has raised its share buyback guidance to a $10 billion per year run rate and will drive towards a return on capital employed of 12% by 2026. Also, Chevron's working towards lowering the debt on its balance sheet to below 20%, which could increase shareholders' residual value.
Chevron will likely feel pressure on its downstream operations soon as consumers' pushback against higher gas prices is becoming an issue. Nevertheless, as Chevron owns most of its value chain, it can adjust its margins vertically with relative ease. Thus, systemic headwinds are likely to be of minimal concern to vertically integrated companies such as Chevron.
Valuation
At a price-book ratio of 2.43 and a price-earnings of 17.02, it's valid to say that Chevron's richly valued compared to absolute thresholds. But Chevron's price-earnings ratio is trading at a 28% discount compared to its five-year normalized average,
I'd opine that the stock's book value could remain a concern. However, the company is still attempting to deleverage its balance sheet after pandemic-related demand declines hurt its capital structure.
Dividends
Chevron posesses tremendously attractive dividend properties. Firstly, the stock's lucrative dividend yield is accompanied by six years of dividend growth and a payout ratio of 51.37%, suggesting that investors are receiving excellent value for their money.
Additionally, Chevron's dividends look well-substantiated as the stock boasts a cash per share ratio of 2.5 and a dividend coverage ratio of 2.94.
The bottom line
There are still many reasons for investors to be positive about Chevron stock. I believe that its time as a cyclical value play is over for now. However, I expect investors to still find the stock attractive due to the quality and dividend attributes.
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