If you buy an energy stock, one of the most important things you have to understand is the inherently volatile nature of the commodity-driven sector. In fact, oil and natural gas price swings can be shockingly swift and dramatic. And yet Chevron (CVX 1.33%) has proven time and again that dividend investors can count on it. Here's why Chevron is a no-brainer dividend stock in the energy patch.
Consistency is key for Chevron
The 2020 global pandemic threw oil prices into a tailspin, as social distancing, business closures, and working from home led to a massive decline in demand amid the public health crisis. The industry downturn was fast and deep, with West Texas Intermediate crude oil prices, a key U.S. oil benchmark, falling below zero for a brief moment in time. There was an unusual confluence of events that led to that, but step back and consider what a negative price means -- energy producers were technically paying customers to take oil.
And yet, integrated energy giant Chevron increased its dividend in 2020 despite the massive price drop. The dividend was increased again in 2021 and once more in 2022. In fact, Chevron's streak of consecutive annual dividend increases is up to 35 years, making it a Dividend Aristocrat. That's incredible given the inherently cyclical nature of the oil sector. But the real truth is, while the pandemic itself was shocking and the reaction in the energy sector unsettling, the prices of oil and natural gas rise and fall all the time. Chevron just did the same thing it always does to deal with it, and, as usual, lived to fight another day with its dividend still intact.
What's the secret sauce? A rock-solid balance sheet, which is evidenced by its highly conservative debt-to-equity ratio. Right now Chevron's debt-to-equity ratio, at 0.17, is lower than any of the company's closest peers. However, the real story is what happens when the energy sector is suffering through big oil and gas price pullbacks.
A picture is worth a thousand words
In 2020, when oil prices were plunging, Chevron pulled back on capital spending just like all of its peers. However, it continued to fund its most important capital investment projects and, as noted, supported its dividend. U.S. peer ExxonMobil (XOM 1.15%) did the same thing, but wasn't able to get back to dividend growth quite as quickly. TotalEnergies held its dividend through the downturn but it doesn't have the same dividend growth history behind it. BP and Shell both ended up cutting their dividends, couching the dividend changes as part of bigger plans to increase investment in clean energy.
Chevron supported the dividend and investments despite falling earnings because its balance sheet strength allowed it to take on debt to support its cash flow needs. And when oil prices recovered, the company quickly got to work reducing leverage. Exxon did the same, but it had more deleveraging to do so it ended up holding the dividend steady for 10 quarters and then only increased its dividend by a token penny a share per quarter (about 1%) in late 2021. Chevron's dividend was held level for half as long (five quarters) and the next dividend increase, in early 2021, was about 4%. That increase was followed by a 6% hike in early 2022. It basically managed through the storm better than its closest peers.
The chart below comparing Brent Crude prices, a key international oil benchmark, with Chevron's debt-to-equity ratio trends shows what took place on the company's balance sheet.
But, as noted above, oil and natural gas are volatile. So this wasn't the only time that Chevron has been in such a position. Look at the oil-price drop between 2015 and 2016. Just like in 2020, Chevron leaned on its balance sheet to make sure it could keep paying investors and supporting its business.
And when oil prices plunged in 2008, the same thing happened. Chevron's leverage rose, it supported its dividend, and when the energy sector recovered, it mended its balance sheet.
Clearly, this is a tested and successful approach. While every energy downturn is unique and Chevron managed through some better than others, the consistent approach should give conservative dividend investors the confidence to buy Chevron even though energy prices are volatile over time. Simply put, the company knows how to deal with the energy industry's ups and downs while continuing to pay investors well for sticking around.
Rewarding shareholders through thick and thin
Oil prices have recovered from their pandemic lows and energy companies like Chevron are generating very strong earnings. However, energy prices have started to pull back some from their recent highs, which is a reminder of why long-term investors should pay attention to how well oil producers manage market downturns. On that score, Chevron, which currently offers a generous 3.9% dividend yield and the strongest balance sheet among its closest peers, has proven it is a standout.