Investors have had a rough go of it this year. The S&P 500 is down 20% since the year started, while the tech-heavy Nasdaq Composite is down 34% and firmly in a bear market. If you're an investor looking for passive income in these market conditions, one stock worthy of your consideration, and one that Warren Buffett bought, is Chevron (CVX 1.04%).
Chevron has done a stellar job of raising its dividend payout for decades. Even during the pandemic, when oil prices plummeted, Chevron was one of the few oil and gas companies that maintained and even increased its dividend payout. Here's why this Buffett stock can be a stellar source of passive income in the bear market.
A well-balanced business resulting in a growing dividend
Chevron runs a balanced business in the oil and gas industry, making the stock less volatile than its peers. Its upstream operations include exploring, producing, and transporting crude oil and natural gas.
This segment benefits from higher oil and gas prices and has generated record profits for the company. Its downstream operations include refining crude oil into petroleum, transporting refined products through pipelines, and operating gas stations worldwide.
Chevron's business is balanced across the supply chain, making it less vulnerable to swings in oil and gas prices and providing more stable earnings versus competitors. This balanced business is a big reason why Chevron has rewarded shareholders with an increasing dividend payout for 35 consecutive years.
Elevated oil prices led to record cash flows
Like most oil and gas companies, Chevron benefits from higher oil prices. The pandemic and related lockdowns and travel restrictions hurt oil prices, which traded below $30 for about two months. Since then, oil prices have risen -- to the delight of those oil and gas companies.
Following Russia's invasion of Ukraine, oil prices spiked to over $130 per barrel. Oil prices have stayed high all year, helping pave the way for Chevron's staggering profits and cash flow. Chevron's net income through nine months is $29 billion, a 175% increase from the year before. Its cash flow from operations this year is a staggering $37.1 billion.
Data by YCharts.
A word of caution when investing in energy stocks
Energy companies have done quite well, but investors can't expect this to continue forever. The business is highly cyclical, so it does well when prices are elevated. The corollary is that its earnings suffer when oil prices come back down. However, the good news is that Chevron's break-even price to maintain its dividend and some buybacks is about $50 per barrel.
One thing that could keep a floor on oil prices is the U.S. purchase of oil to refill its strategic petroleum reserve (SPR). Since the Russian invasion of Ukraine, the U.S. has withdrawn 180 million barrels from the SPR.
The U.S. plans to buy back about one-third of barrels withdrawn and recently announced a plan to purchase 3 million barrels to kick-start the process. It aims to replenish its reserves at around $68 to $72 per barrel, which could keep oil prices elevated.
Other global tailwinds may keep oil prices elevated next year, like China's reopening. According to comments made by Energy Aspects' director of research Amrita Sen to The Wall Street Journal, "The pent-up demand out of China is going to be enormous."
OPEC production cuts could also keep oil prices from falling too far in the next year. Analysts at Goldman Sachs and Morgan Stanley are forecasting $110 for Brent oil -- which should bode well for Chevron and other energy producers.
Here's why Warren Buffet likes Chevron
Oil companies have attracted the eye of Berkshire Hathaway's Warren Buffett. This year, Berkshire purchased over 127 million shares of Chevron, with the bulk of the purchase coming in the first quarter.
What's not to like? Chevron has a sound business model and healthy balance sheet, which has played a crucial role in raising its dividend payout for the past 35 years.
The company's staggering cash flow is another thing to love. This cash flow allows Chevron to grow its dividend, buy back $3.75 billion in shares in the third quarter alone, and pay down its debt. Its debt-to-equity ratio is one of the lowest in its peer group, and its balanced business has it well-positioned, even if oil prices fall.
Chevron pays a dividend of 3.3% and should have no problem maintaining and growing this after its earnings windfall. There's evidence that oil prices could stay elevated in 2023 -- making this Buffett stock an excellent source of passive income in this bear market.
