How Safe Is Chevron's Dividend?

Chevron (NYSE:CVX) is one of the largest oil and gas companies in the world, and it has grown substantially over the course of its long history. All energy companies are susceptible to the ups and downs of the oil market, and recent poor performance in crude has knocked many industry stocks for a loop. Chevron hasn't taken that big of a share-price hit, but its earnings have fallen enough to make some nervous about the sustainability of its lucrative dividend yield. Given its track record as a dividend stalwart, Chevron's dividend is relatively safe, but investors are right that the stresses on its payout policy are greater than usual.

Dividend stats on Chevron

Source: Yahoo! Finance. Last increase refers to the ex-dividend date.

Chevron's dividend growth over time

Chevron has done a good job of rewarding shareholders with steadily increasing dividend payouts. The integrated oil giant qualifies as a Dividend Aristocrat, and a nearly three-decade track record of annual dividend increases point to the tenacity that Chevron has shown in ensuring that investors can count on steadily rising quarterly payouts from their shareholdings.

Despite reliable increases, Chevron hasn't always been consistent about the amount of dividend growth it provides. As you can see in the chart below, there have been periods during which Chevron's quarterly payouts have grown at a feverish pace. At other times, the oil giant has just barely qualified to see its streak continue, using a technicality to extend its track record. For instance, the dividend increase Chevron made in late 2016 was its first since 2014, but because it was made late in the year, the total amount of dividends that Chevron paid throughout 2016 was higher than it had been in 2015, which in turn was slightly higher than the 2014 total.

CVX Dividend data by YCharts.

New concerns on Chevron's dividend

Chevron has also been increasingly stingy with its dividend increase. The boost it made late last year was just $0.01 per share on a quarterly basis or less than 1%. That pales in comparison to double-digit percentage increases that investors have seen in the past.

The reason for Chevron's hesitation is fairly obvious, though: its earnings have suffered in the poor market conditions prevailing right now. Plunging oil prices led to asset writedowns that in turn created GAAP losses in multiple quarters. Even once crude stabilized, the amount of profit Chevron made wasn't enough to cover its dividends. That's the reason why payout ratios have ballooned to nearly 300%.

Image Source: Chevron.

Should investors worry about Chevron dividends?

Overpaying dividends relative to earnings and cash flow is unsustainable in the long run, but some investors are hopeful about Chevron's near-term future prospects. Current consensus projections put earnings at more than $4 per share this year and more than $5.25 per share in 2018, and that already reflects the recent drop in crude prices back below $50 per barrel. If earnings can return to a more sustainable level, then the oil giant should find itself in a much safer position to cover its dividend through earnings.

In the long run, Chevron will do best if oil prices can recover from their current levels. That way, the company will be able to recommit to more substantial dividend growth without having to sacrifice on capital expenditures to boost future production. If oil stays in its current low range or falls from here for an extended period of time, then Chevron investors should start to get more worried about the dividend.