Chevron (CVX 1.04%) is one of the world's largest integrated energy companies, with a huge $320 billion market capitalization. While some of its peers have started to shift aggressively toward cleaner alternatives, Chevron has largely stuck with what it knows and has benefited mightily as energy prices rebounded from early coronavirus pandemic lows. There are a number of important factors here that suggest Chevron is a no-brainer dividend stock.
1. The dividend streak
The energy sector is highly cyclical, with often dramatic and swift ups and downs being the norm, not the exception. The deep industry downturn during the early days of the pandemic, the result of a drop in demand caused by the economic shutdowns to slow the spread of COVID-19, helped usher in dividend cuts at peers BP and Shell. However, ExxonMobil and TotalEnergies, along with Chevron, continued to support their dividends.
CVX Dividend Per Share (Annual) data by YCharts
That said, Chevron's annual dividend streak is second only to Exxon's 40-year record. At 36 years, Chevron's dividend has continued to increase through the pandemic, the Great Recession, and the dot-com bust, among many other market upheavals. You don't build a record like that by accident, and investors would do well to recognize the immense level of commitment it shows to dividend investors.
2. Dividends make a big difference
For a long-term investor, it is important to consider the difference between a stock-only return and total return, which includes the reinvestment of dividends. From a stock-only point of view, Chevron's stock has grown a $10,000 investment to around $14,400 over the past decade. That's not so impressive. But had you reinvested the dividends, that $10,000 investment would have turned into $21,800, quite a bit more attractive.
The big news here, though, is that the energy industry goes in and out of favor quite regularly. When Chevron's shares are down and out, its reliable dividend buys more shares. That helps to juice long-term investment performance when the industry, and Chevron's stock, comes back into vogue.
3. Navigating the tough times
So how does Chevron manage to keep its dividend growing despite the inherent volatility of the industry in which it operates? The answer is that the oil giant has a rock-solid balance sheet. And it isn't afraid to lean on the balance sheet, by increasing leverage, during the hard times so it can continue to invest in its business and support its dividend. The pandemic period has been a valuable example.
CVX Debt to Equity Ratio data by YCharts
Heading into 2020, Chevron's debt-to-equity ratio was quite low at around 0.2 or so. As the energy sector hit the skids, with West Texas Intermediate (a key U.S. oil benchmark) going below zero at one point, Chevron's debt-to-equity ratio roughly doubled. And now that energy prices have bounced back, Chevron has worked to restore its balance sheet strength, pushing the debt-to-equity ratio to roughly 0.15. Clearly, the energy giant is already getting ready for the next industry downturn.
4. Plenty of room for adversity
While Chevron's strong balance sheet is interesting on an absolute level and relative to its peers (it has the lowest debt-to-equity ratio among its closest competitors), it is also interesting to view it from a broader perspective.
CVX Debt to Equity Ratio data by YCharts
Indeed, some of the largest and most respected dividend payers, including Dividend Kings like Coca-Cola, Johnson & Johnson, and Emerson Electric all have higher debt-to-equity ratios. To be fair, each of these companies operates in drastically different industries and are subject to materially different risks. However, it should also be apparent that Chevron has worked to ensure it has the financial wherewithal to handle adversity.
CVX Debt to Equity Ratio data by YCharts
With such a robust balance sheet, there is a lot of room for bad news before the board would need to start discussing dividend cuts.
Riding out the storm
The energy sector is performing fairly well today, so dividend investors looking to buy an oil major would do well to err on the side of caution. Chevron should be a clear favorite, even though its 3.5% dividend yield is hardly huge by historical standards. If you prefer to take a more value-oriented approach, Chevron is a name you'll want to keep on your wish list for the inevitable next energy downturn.
