Chevron‘s (CVX 0.63%) shares are down just about 20% since hitting a peak in 2022. Brent Crude, a key oil benchmark, is down around 40% since 2022. There’s a lot of information in those two facts, and the story gets even more interesting when you add in Chevron’s 4.1% dividend yield. Let’s see what this might all mean for investors considering exposure to the energy sector.
What does Chevron do?
Chevron is what is known as an integrated energy company. That means that its business spans the entire energy industry, from the upstream (energy production) through the midstream (pipelines) and into the downstream (chemicals and refining). On top of that, despite being an American company, it has a globally diversified portfolio.
All of this diversification has a purpose: It helps to soften the swings in the inherently volatile energy sector.
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Oil and natural gas prices can swing swiftly and dramatically, which will have a huge impact on Chevron’s financial performance. However, each segment of the industry reacts differently to such swings. For example, low energy prices are a handicap for the upstream segment, have little impact on the midstream, and can actually be a benefit to the downstream, given that oil is a key input in the chemical and refining industries. Chevron’s financial performance will rise and fall along with energy prices, but the swings won’t be as bad as those faced by a production-focused company.
Moreover, given this diversification, Chevron can manage its business so that the most attractive areas, in the industry or geographically, are the ones in which it invests for growth. For example, the last few years have seen Chevron invest heavily in the onshore U.S. energy space. Given Chevron’s size and financial strength (the company’s debt-to-equity ratio is a very low 0.16), it can also act as an industry consolidator. It bought U.S.-focused Noble Energy in 2020 specifically to expand in the United States.
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Chevron is down but not out
With that background, it is time to consider the dividend. Not the yield, but the actual dividend payments that Chevron has made over time. Despite the highly volatile nature of the energy sector, Chevron has increased its dividend annually for 37 consecutive years. That’s not the longest streak in the energy patch, but it is still incredibly impressive given the nature of energy commodity prices. The yield today is 4.1%.
Chevron’s dividend yield has been higher, notably so during deep industry downturns. But 4.1% is more than three times the yield on offer from the S&P 500. And it is materially above the 3.3% of the average energy stock. If you are looking for a dividend-paying energy stock, Chevron is an attractive choice.
But it is the dividend streak that should be most appealing to long-term dividend investors. Chevron has proven, though good energy markets and bad ones, that it places a material focus on returning cash to investors. It has managed this thanks to its diversification and financial strength.
Most notably, during industry downturns, the company’s low leverage allows Chevron to take on debt so it can continue to fund its business and support its dividend. When the energy sector recovers, as it always has in the past, management reduces debt in preparation for the next downturn. It is a model that has clearly worked out very well for Chevron and for dividend investors.
Why buy this magnificent energy stock today?
Energy price swings are going to lead to swings in Chevron’s financial performance and stock price. It is virtually impossible to avoid such swings. But Chevron’s yield is relatively attractive today, and history suggests that the company will continue to support that dividend in the future, as it has in the past.
If you are looking for a high-yield energy stock to buy and hold forever, Chevron is a very good option for conservative income investors. Even aggressive investors should like this story given the inherent volatility of the energy sector.
