Why I Finally Added This Elite Dividend Stock to My Portfolio

I’ve followed oil giant Chevron (CVX -0.32%) for several years. Over that time, I’ve grown to respect the company’s management team and strategy, which centers around paying a rising dividend. Chevron is one of the best in that department, having increased its payout for 36 straight years, the second-longest streak in the oil patch, trailing only ExxonMobil.

Chevron is the type of dividend stock I love to own. Here’s why I finally decided to add it to my portfolio.

A cash-flow machine

Chevron has built its dividend on a very strong foundation. The company’s integrated and low-cost business model generates meaningful cash flow in a variety of market conditions. As the left side of the following slide shows, it can produce more than enough cash to cover its dividend and capital program over the next several years amid lower oil prices:

A slide showing Chevron's cash flow generating capabilities at various oil price points.

Image source: Chevron.

The company has stress-tested its business to a downside scenario where oil averages $50 a barrel in 2025 through 2027, with a blended average of $60 a barrel in the 2023 to 2027 time frame. That’s well below the current price in the $80 range.

Even in that downside scenario, Chevron says it can produce enough cash from operations to pay a growing dividend, fund its capital program, and buy back shares at the low end of its $10 billion to $20 billion annual range, with its elite balance sheet helping cover some of that buyback.

Chevron currently has a fortresslike balance sheet, giving it the flexibility to continue buying back shares even if oil prices cool off considerably. The company ended the third quarter with $6 billion in cash and a low net-debt ratio of 8.1%. That’s well below its target leverage ratio in the range of 20% to 25%, giving it lots of capacity to continue buying back shares even amid low oil prices.

Enhancing its cash flow and growth profile

Chevron recently took a step to enhance its already strong business by agreeing to buy Hess (HES -0.41%) in a $60 billion all-stock deal. The transaction will be accretive to its cash flow per share starting in 2025 when Hess and its partners start up their fourth floating production storage and offloading vessel in Guyana.

Meanwhile, it will increase Chevron’s projected five-year production and free-cash-flow growth rates while extending its growth profile into the next decade:

A slide showing how the Hess deal will enhance Chevron's cash flow and growth.

Image source: Chevron.

As that slide shows, Chevron is now on track to more than double its annual free cash flow by 2027, assuming oil averages $70 a barrel during that time frame.

That stronger cash flow drives Chevron’s view that it can deliver accelerated dividend growth over the coming years. It has already achieved peer-leading dividend growth of 6% annually over the last five years, a pace it has maintained over the past 15 years. It expects to boost its payout by 8% next year and could continue increasing it at that more-elevated rate over the next few years, thanks in part to the Hess deal.

Another factor fueling its ability to deliver accelerated dividend growth is its meaningful share-repurchase program. Chevron expects to increase its buyback rate to the upper end of its range ($20 billion per year) following the Hess deal.

At its current market value, that share-repurchase pace would retire 5% to 6% of the company’s outstanding shares each year. With its free cash flow growing rapidly, and its share count falling, Chevron will have no problem continuing to grow its dividend per share at an annual rate in the mid to upper single digits.

A great time to buy

While I love the value-enhancing Hess deal, the market didn’t like the acquisition. Because of that and lower oil prices this year, Chevron’s stock has fallen more than 20% in 2023, pushing its dividend yield over 4%.

I thought the sell-off was too good of an opportunity to pass up on such an elite dividend stock, which is why I finally added shares to my portfolio.

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