The energy sector is under intense pressure right now, due to two main factors that have dealt the industry a great deal of damage. First, a global supply glut from a multi-year period of rising production has put downward pressure on commodity prices. If that weren’t bad enough, major oil and gas companies have had to deal with the coronavirus pandemic, which has caused a notable drop in demand.
Add it all up, and this is no easy time to be an investor in the energy sector. But we still see value among the major big oil super-majors, particularly high-quality dividend stocks such as Chevron Corp (NYSE:CVX). Chevron is a time-tested oil super-major with a long history of paying rising dividends, even in recessions and other difficult periods.
Chevron is a dividend aristocrat, with more than 30 consecutive years of dividend increases. It also has a high yield of 7.2%. As a result, Chevron is a top high-yielding dividend stock for income investors.
Business Overview And Recent Earnings
Chevron is a global oil and gas super-major. It is an integrated company, meaning it operates upstream exploration and production, midstream transportation and storage, and downstream refining of oil and gas. Chevron is the second-largest U.S. energy company with a market capitalization of $135 billion.
Not surprisingly, Chevron has been negatively impacted by the coronavirus pandemic and weak commodity prices to start 2020. Due to the impact of the pandemic on the global demand for oil, production fell 3% in the 2020 second quarter, while the average realized oil price plunged from $57 to $20 per barrel. The overall result was that Chevron swung to a loss of $1.59 per share, reversing a profit of $1.77 per share in the year-ago quarter.
Growth Prospects Intact Even With Weak Oil Prices
The direction of oil and gas prices is a main contributing factor to future growth, when it comes to the super-majors. Therefore, many oil and gas companies, including Chevron, will continue to see a meaningful headwind if commodity prices remain weak. However, oil and gas prices could rise in the coming months, as many large companies have announced significant capital expenditure reductions. For its part, Chevron’s second quarter capital expenditures were cut by 37% compared with the same quarter last year. It is also possible that OPEC will agree to further production cuts, which would be a positive catalyst for oil and gas prices.
Even if commodity prices do not rise materially from here, Chevron still has growth catalysts intact. Acquisitions are a positive growth catalyst moving forward. On July 20, Chevron agreed to acquire Noble Energy (NASDAQ:NBL) for $5 billion in an all-stock deal. The deal will provide Chevron with low-cost proved reserves and promising undeveloped resources.
New projects are also a catalyst for Chevron. Chevron is now in the positive phase of its investing cycle. It grew its output by 7% in 2018 and 4% in 2019, and expects to grow its output by 3%-4% per year until 2024. The pandemic has derailed its growth trajectory this year. Nevertheless, we expect the pandemic to subside next year and Chevron to return to growth mode thanks to its sustained growth in the Permian Basin and in Australia. Chevron has more than doubled the value of its assets in Permian in the last two years thanks to new discoveries and technological advances. Chevron’s main competitive advantage is its size and industry position. As major projects have recently been completed, we expect Chevron to return to growth once the pandemic ends. This will be particularly important for sustaining the company’s hefty dividend.
Dividend Analysis
Chevron’s dividend is one of the most attractive aspects of the stock as an investment. Indeed, the company currently pays an annualized dividend payout of $5.16 per share, which equates to a 7.2% current yield. This is an extremely high yield, which makes the stock very appealing for income investors. The stock doesn’t have to do much more than pay its dividend to match average stock market returns. The S&P 500, on average, is less than 2% right now. And with interest rates at rock-bottom levels, Chevron’s yield really stands out.
Of course, investors need to assess the sustainability of a dividend payout. Avoiding dividend cuts is imperative for income investors. Chevron reported steep losses to begin 2020, which adds uncertainty to the dividend payout. For what it’s worth, Chevron management has reiterated that the dividend remains a top priority within the company’s financial framework. Still, the company needs to return to profitability in order to maintain the dividend payout.
Fortunately, Chevron has a well-established track record of paying its dividend, even in recessions and downturns in the oil and gas industry. The company has increased its dividend for 33 consecutive years, a period of time that encompassed multiple recessions. Therefore, there is at least a precedent of maintaining the dividend in turbulent times.
As a commodity producer, Chevron is vulnerable to any downturn in the price of oil, particularly given that it is leveraged to the oil price. In addition, the oil major currently has an unsustainable payout ratio due to the impact of the pandemic on its business. However, we expect the pandemic to subside from next year and the payout ratio to become sustainable again in the upcoming years.
Final Thoughts
Investors need to be selective when purchasing oil stocks. The business environment has deteriorated, which has exposed many over-indebted stocks with unsustainable dividends. This is why the energy sector has experienced so many companies cutting or eliminating their dividends. If commodity prices stay weak, more dividend cuts are likely in store for the energy sector.
Chevron continues to pay its dividend, and management has reiterated its commitment to maintaining the dividend payout. The company has increased its annual dividend for over 30 years in a row, an impressive track record of consistent dividends. With a high yield above 7%, we view Chevron stock as a buy for income investors.