Despite outperforming its closest peer ExxonMobil (XOM) over the past 10 years, Chevron (CVX) shares have lagged since the price of oil started dropping. In the past 12 months, CVX stock is down 25% versus a roughly 15% decline for XOM shares.
While the price of oil is down considerably more than CVX stock, moves of this magnitude are rare for CVX. Only during the financial crisis were shares down more during such a short period of time, and that was when oil prices bottomed at $10 per barrel lower than this year’s trough.
After the previous decline of this magnitude in 2008/2009, CVX shares went on to return almost 100% in less than two years. Does the stock have a similar potential this time around?
The business
CVX operates through two segments: Upstream and Downstream.
Upstream: Operations consist primarily of exploring for, developing and producing crude oil and natural gas; processing, liquefaction, transportation and regasification associated with liquefied natural gas (LNG); transporting crude oil through international oil export pipelines; transporting, storing and marketing natural gas and operating a gas-to-liquids plant.
Downstream: Operations primarily consist of refining crude oil into petroleum products; marketing crude oil and refined products; transporting crude oil and refined products by pipeline, marine vessel, motor equipment and rail car, and manufacturing and marketing commodity petrochemicals, plastics for industrial uses, and fuel and lubricant additives.
Dividend is nearing all-time highs
CVX’s dividend has only hit a >4% yield twice in the past 20 years. Under both previous scenarios, it would have been a wise investment decision to buy shares. If you had bought during the 2002 dividend yield peak, you would have accrued the 4% annual dividend as well as an average 9% annual capital appreciation on the stock for the next 13 years. After the 2009 dividend peak, you would have had a similar 4% dividend yield plus 5% in annual capital appreciation.
The dividend's safety should not be in question either. Even in 2008/2009 when oil prices dropped 75%, CVX was still able to grow its dividend payments, keeping the payout ratio at only 50% of earnings. With the recent collapse in oil prices a bit more mild, CVX should be able to navigate the current turbulence with similar stability. The company has raised its dividend every year for over 20 years.
Valuation isn’t that demanding
Although its dividend yield is attractive, its also important not to pay too much for this income stream given the depressed state of oil prices. Fortunately, CVX shares don’t look too pricey in comparison to its history.
Shares are currently trading in-line with the rolling five-year and 10-year median P/S, P/E, and P/CF ratios. On a P/B basis, shares actually look quite cheap.
Conclusion
It’s not often that you can buy a blue-chip company like Chevron at a 4% dividend and very undemanding valuation. Don’t be surprised if shares have a respectable long-term return similar to what happened after the previous two downturns.
For more ideas like this one, check out GuruFocus’ High-Yield Dividend Stocks List or the rest of R. Vanzo’s Articles.
