Financially speaking, Chevron (CVX 0.25%) had a very good year in 2022. Investors benefited along the way as the stock price rose over 50% in a year when the S&P 500 index sank nearly 20%. Despite the impressive financial performance, Chevron only increased its dividend by 6%. That has some investors upset, but they should actually be pleased with the outcome. Here's why.
What a year
To understand the dividend issue you need to get a handle on just how good a year Chevron had in 2022. Revenue in 2022 totaled $246.3 billion, up from $162.5 billion in 2021. Earnings per share tallied up to $18.28 per share last year, compared to $8.14 in 2021. That's a massive year-over-year increase, helped along by a record production year for U.S. oil and natural gas.
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But to see just how good 2022 was, you really need to go back to 2020. In the year when the coronavirus pandemic led to a massive energy sector downturn, Chevron lost $2.96 per share. That's a huge bottom-line swing in just three years. To be sure, the pandemic had a little something to do with it, but the energy sector is notoriously cyclical. Dramatic swings, both up and down, are the norm, not the exception.
In other words, Chevron did have a good year in 2022, but investors shouldn't look at this as some permanent plateau. The company's management is very aware that it is simply a matter of time before the pendulum swings back in the other direction.
Small hikes are better
So, any investor expecting more than a modest dividend hike was probably expecting too much. In fact, the 6% dividend increase is nothing to sneer at, even though inflation is running pretty hot today. To really appreciate the dividend hike investors need to go back to 2020 again. In that difficult year Chevron increased its dividend, bringing the streak to 33 years despite the red ink it was experiencing at the time. The dividend was increased again in 2021 and, as already noted, yet another time in 2022, bringing the annual streak up to 35 years.
NYSE: CVX
Key Data Points
The consistency during the industry downturn is why dividend investors should find a company like Chevron attractive in the energy space. Management clearly believes the dividend is important and is willing to support it through thick and thin. But it can only do that if the dividend remains at a reasonable level. If the dividend goes too high too fast a dividend cut would become a bigger risk during the inevitable industry pullbacks. There are companies, like Pioneer Natural Resources, that have variable dividends that rise and fall along with financial results. But that's an entirely different type of dividend stock.
Which is why Chevron has chosen to use share repurchases as a way to return extra value to investors. Buying back stock helps to boost earnings per share because net income is spread across fewer shares. That, in turn, can help boost the stock's price over time. Chevron repurchased 70 million shares for $11.25 billion in 2022. On top of that, Chevron's board approved an additional $75 billion worth of buybacks. So look for more share repurchases to come, assuming the company's results remain strong. But, if oil prices fall, Chevron isn't obligated to buy back stock, giving it more leeway during industry downturns.
The right stuff
You could argue that buying back stock when Chevron's price is high isn't a great use of cash. However, it would be much worse to increase the dividend and then have to cut it because the cyclical industry hit a downdraft. The modest dividend increase in an incredibly profitable year in 2022 is the other side of the increase made during a disastrous year in 2020. All in all, the company's conservative approach to the dividend, supplemented by share buybacks when appropriate, is really another reason to like Chevron, not a disappointment.
