Warren Buffett has arguably the most successful investing career of all time, so people pay attention when the Oracle of Omaha makes a move. Buffett began buying shares of integrated oil major Chevron Corporation (CVX 1.04%) in latter 2020 but has already built it into his third-largest holding, including increasing his stake by 2% in the third quarter. That's moving pretty quickly for an investor who thinks in terms of years and decades.
So what about Chevron has appealed to Buffett, and does that mean it's suitable for your portfolio? Let's look at what makes Chevron a classic Buffett stock and how to tell whether you should consider buying the stock today.
A dividend stock in true Buffett fashion
Chevron is an integrated oil major; it explores for, extracts, and refines oil and natural gas and is one of the most prominent players in energy. Buffett loves dividends; most of his portfolio holdings pay dividends, and Chevron is no exception. The company has paid and raised its dividend for 35 consecutive years, enduring the ups and downs of oil prices over time. It fits Buffett's preference for established, durable, and profitable businesses that return capital to shareholders.
CVX Revenue (TTM) data by YCharts. TTM = trailing 12 months.
Buffett acquired most of his Chevron stake in late 2021 and early 2022, and you can see that Chevron's revenue has soared since then, driven by higher oil prices. The boom in revenue has created a cash windfall, with Chevron generating $36 billion in free cash flow over the past year, reinvigorating the company's balance sheet. Chevron now has a rock-solid financial foundation that includes roughly $8 billion in net debt (what's left after subtracting cash on hand).
That puts the dividend on solid ground. Investors can get a 3.2% dividend yield today, and the dividend payout ratio is just 31% of Chevron's profits. Oil prices directly impact Chevron's business, so a sharp downturn in oil could skew the payout ratio. However, the company's strong balance sheet seems ready to backstop the dividend when times get tough, as it has for decades.
Is Chevron suitable for your portfolio?
Chevron is an outstanding dividend stock for any income portfolio and is one of the world's largest energy companies. But answering whether you should run out and buy shares today is a bit trickier. Buffett did most of his buying between the third quarter of 2021 and the first quarter of 2022. You can see below that the stock rose 53%, ending up near $163 per share. Today, the stock's even higher, trading at $179.
Buffett's notorious for finding a bargain, and the slowing of his purchases since then signals he no longer sees Chevron as a table-pounding buy. Chevron is a cyclical business, meaning it experiences both growth and contraction periods, and Chevron's exposure to oil price volatility has a lot to do with that. There are many ways to value stocks, one centered around free cash flow. Usually, you'll want to get as much of a company's cash profits as possible for your investment. Measuring the free cash flow per share versus the stock price (free-cash-flow yield) is one way to do that.
Investors often want to buy a stock when the free-cash-flow yield is very high, but that's not always the case. Ironically, you can see below that the best times to buy Chevron stock have been when the free-cash-flow yield is low or even negative. Why? Historically, investors have bought Chevron when oil prices were high and the company was making a lot of money and then sold when falling oil prices dragged the business down.
Chevron's free-cash-flow yield is at more than 10%, one of its highest over the past two decades. Of course, the stock could keep increasing in the near term. But given its 53% gain over the past year, the stock might not have much steam left in the short term. Investors can consider the stock one to keep monitoring, or they can buy shares very slowly if they want the dividend as it is. Either way, Chevron is far pricier than when Buffett bought most of his shares a year ago.
