t’s that time again. We’re putting two iconic dividend payers in the ring for an old-school Dividend Smackdown. This is a faceoff between energy major Chevron Corporation (NYSE:CVX) and telecom giant AT&T (NYSE:T), two stocks that have taken more punches than Rocky Balboa of late. But like Rocky, I expect Chevron to eventually rally and return a few punches of its own. I’m not sure about AT&T, however.
Chevron, like the rest of the oil majors, has taken an absolute beating over the past year. Its share price is down about 23% since late July and has underperformed the S&P 500 by nearly 28%. AT&T hasn’t had the smoothest ride either, for that matter, down about 6% over the same period. But investor sentiment has been particularly sour towards Big Oil following the collapse in the price of crude.
Value Proposition
Let’s dig into Chevron. As a value investor, there is a lot I like here. Its price/earnings and price/book ratios are sitting near multi-year lows at 10.2 and 1.3, respectively. This is because Wall Street is a little less than enthusiastic about Chevron’s earning power in a low-crude-price environment, but after the beating the stock price has taken, it would seem that the bad news is mostly priced in.
Chevron’s dividend yield, at 4.1%, also makes it one of the highest yielders in the S&P 500. And Chevron has been a very aggressive dividend raiser over the past decade, growing its dividend at a 10.2% annualized rate. To put that in perspective, had you bought Chevron 10 years ago and held until today, your effective dividend yield today on your original cost would be nearly 11%.
Chevron has raised its dividend for 26 consecutive years running, and I don’t expect it to stop the chain any time soon. Chevron’s dividend payout ratio is a very manageable 42%. Even if Chevron shoots air balls for the next several quarters with new projects, its dividend would seem safe for the foreseeable future even if dividend growth slows for several quarters. Chevron recently suspended its share buyback program, which is a letdown but also a completely reasonable defensive move given its difficult operating environment.
Chevron has had a harder time ratcheting down its capital expenditures than some of its Big Oil peers. Unfortunately for Chevron, several of its big projects—including major liquefied natural gas projects in Angola and Australia and multiple platforms in the Gulf of Mexico—are at stages that require a lot of capital spending that cannot be postponed. That’s going to hurt profitability and may force Chevron to borrow a little more heavily than usual. But with a debt-to-equity ratio of just 18%, Chevron has the ability to borrow pretty heavily without putting its long-term future at risk.
Is Chevron my favorite Oil Major? No, it’s not. I’d prefer Exxon Mobil (NYSE:XOM) domestically, along with the European oil majors. But this Dividend Smackdown isn’t between Chevron and Exxon. It’s between Chevron and AT&T. And AT&T faces some major issues of its own.
Brutal Competition
Price competition in mobile is brutal and rival T-Mobile (NYSE:TMUS) fired a shot across the bow two years ago when it eliminated carrier subsidies for handsets and introduced unlimited, no-contract data plans. AT&T and Verizon (NYSE:VZ) have had to scramble to compete on price. But with smartphones requiring ever-higher amounts of bandwidth, AT&T’s capital spending has been higher than ever.
Lower margins and higher capital spending are a rough combination, and one that hasn’t gone unnoticed on Wall Street. AT&T’s stock price has drifted sideways for nearly three years, completely missing the monster rally of 2013 and 2014.
AT&T sports a very nice dividend at 5.6%, but its payout ratio has been above 100% in three out of the last four years, and dividend growth has been slowing down dramatically. Over the past year, AT&T barely squeaked out a 2% dividend hike.
I’ll summarize Chevron and AT&T’s respective predicaments like this. Chevron has major unavoidable capital expenditures over the next year or two that will sap profitability, but after that its situation should improve. With AT&T, there is really no light at the end of the tunnel. I don’t see mobile service getting any less competitive on price, and AT&T faces long-term threats to its paid TV and internet service businesses too. DISH Network (NASDAQ:DISH) potentially just launched a game changer with its internet-based TV offering, Sling TV and Google (NASDAQ:GOOGL) is rolling out its Google Fiber service in more American cities every year.
The Winner
The winner of this Dividend Smackdown is Chevron. Leave AT&T to ice its bruises.
Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management.
As of this writing, he was long XOM.