- Chevron's current dividend yield is highest in last 20 years . This stock is a proven dividend aristocrat. Its 5.51% yield is extremely safe
- Once Gorgon & Wheatstone fields come on line, they will make a huge difference to revenues and free cash flow levels. Borrowings will decrease and capex will rise from 2017 onwards.
- The company is now trading at below book value levels which also gives the investor big capital gain potential.
Chevron (NYSE:CVX) has been beaten up more than its peers over the last 12 months but analysts are slowly coming around to the potential this stock has. Its share price performance against Exxon Mobil (NYSE:XOM) in particular (its main competitor) over the last 12 months has been disappointing (see chart), which has resulted in many shareholders selling their stakes in Chevron to buy Exxon, which is also a dividend growth stock.
Source:Chevron Stock Price Data by amigobulls.com
Exxon has been able to weather the downturn better due to its bigger downstream division and stronger balance sheet. Furthermore its dividend growth rate is presently higher than Chevron's, even though its yield is smaller at 4%. However what investors have to consider here is that Chevron has practically cut everything in the last 12 months, except the dividend which currently is at a historic 10 year high of 5.51%.
In the first half of this year alone, Chevron saved $2.3 billion by cutting capex by 13% compared to the first 6 months of 2014. Secondly, the company is well on its way in divesting $15 billion worth of assets by the end of 2017, as almost $4 billion of assets were sold in the last quarter alone. Thirdly, the company has curtailed its share buy back programme to ensure that it has the cash necessary to bring the most important projects online as quickly as possible and fourthly, the company is cutting jobs (In the US and internationally), with many jobs also expected to go once the company's huge LNG projects in Australia are up and running.
Therefore when you see the efforts the company is making in order to protect the dividend (with crude oil at around $45 a barrel), it becomes apparent that the dividend will be protected at all costs. Furthermore, Chevron has a 27 year history of growing its dividend every year. The company knows that most of its shareholders are income investors who would sell the stock if the dividend were to be cut. I believe dividends will continue to grow from here. Let's discuss why...
Gorgon & Wheatstone Projects
Firstly the LNG projects in Australia (Gorgon & Wheatstone) are going to play a huge part in Chevron's income statement in terms of revenues and cash flow. Gorgon, the bigger of the two projects, will be the first to start production. The project has been plagued with cost and time overruns. This project has drained the coffers for quite a while now, but it is expected to be shipping its test cargoes by year end and be in full production mode early next year. I believe investors are underestimating how these projects will affect the company's cash flow going forward.
- More than 20% of the company's current capex budget is being ploughed into these projects. Expect this allocation to decrease significantly over the next 12 to 24 months
- Chevron bears state that these projects wont be as successful as originally envisioned because of the underlying natural gas price. However agreements for these projects were entered into way back in 2009 when natural gas prices also dipped below $3USD/mmBTU and crude oil dipped below $50 a barrel. Chevron can still generate free cash flow here even with oil prices (as the price of LNG is lined to oil) at current low levels
- The company's declining revenues (see chart) and free cash flow levels will be substantially boosted when these projects come on line. Gorgon alone will add over 200,000 barrels of oil equivalent per day to the company's production. Furthermore Chevron is projecting that the afore mentioned free cash flow and subsequent asset sales will cover the dividend entirely from 2017 onwards. This is where Wall Street has the problem with the stock. The company issued almost $6 billion in debt in January to basically cover the dividend and keep capex commitments elevated. Its total debt now stands around $30 billion which I don't see as a huge problem in the long term when you consider that when oil prices were elevated (like in 2011), the company reported net income of almost $27 billion. Many companies (especially in mining) have debts equal to their revenue. Chevron is nowhere near that leveraged.
Dividend Growth To Drive Stock Price
Secondly (as the chart shows below), this stock's dividend yield hasn't been this high in the last 20 years, which shows that income investors have a real opportunity here. Long term Chevron buy and hold investors have been used to rising dividend pay outs, irrespective of share price movement. What many investors overlook with dividend aristocrats is that the investor's actual income increases every year irrespective of the share price's performance.
As the chart below shows, whenever the yield spiked, it was quickly followed by a rally in the share price. Income investors act when they see opportunities like this, because they can get almost twice the amount of shares (for the same dollar amount investment) compared to when Chevron was trading at its $133+ highs a share just a mere 15 months ago.
Chevron Trading Below Book Value
Thirdly the company is presently selling for below its book value (see chart) which again smells of opportunity. It is quite rare when you see a large cap dividend aristocrat sell at such a discount. What income investors do here is monitor other dividend growth stocks and sell the stocks in their portfolios with much higher price to earnings ratios and price to book ratios in order to put capital to work in cheap proven stocks.
Chevron for example has a current p/e ratio of 13.05 and a p/b ratio of 0.95 which is definitely very low for dividend growth stocks. The other advantage here is that there should be more capital gain potential here in this stock which should increase returns even more over time.
To sum up, I see practically zero risk of Chevron cutting its dividend. I expect the company to actually raise the current dividend of $1.07 in the not too distant future to keep its record intact. It is still trading near its lows of $69 a share and paying out a dividends with yield of 5.51%. These opportunities do not come around all that often for investors looking for current yield and capital gain appreciation potential.