Chevron (CVX 1.04%) is one of Warren Buffett's five largest holdings. His company, Berkshire Hathaway (BRK.A -0.30%) (BRK.B -0.26%), owns nearly 133 million shares of the oil giant, or about 7% of its outstanding shares. They're currently worth over $20 billion, giving Chevron a 6.1% weighting in Berkshire's investment portfolio.
Chevron continues to prove its worth as an investment. Driving that view is the company's ability to deliver on its four financial priorities. During the first-quarter conference call, the company's management team addressed its success in accomplishing these four financial goals.
Generating and allocating cash
CFO Pierre Breber stated on the call, "Strong operating cash flow enabled Chevron to deliver on its financial priorities during the quarter." He noted that the company delivered:
- A 6% per-share dividend increase
- Higher capital expenditures (capex) within budget
- Net debt ratio under 5%
- Share repurchases at the top of the company's prior guidance range
Management drilled down a bit deeper into each financial accomplishment later on during the call.
The dividend continues going up
CEO Mike Wirth discussed Chevron's dividend. He noted that the company has "got 36 consecutive years now of higher payouts." The CEO also pointed out that these haven't been token raises to keep that streak alive. Wirth stated:
Over the last five years, our dividend growth per share has been double that of our closest peer. So, we've sustained this not over the long haul, but also in the short term through the volatile period of time...I'll say our track record on the dividend speaks for itself.
Chevron stands out as an elite dividend stock. It's growing its payout at a sector-leading rate, despite all the volatility in the oil patch in recent years. Wirth noted on the call that the company delivered a "compound annual growth rate of 6% over the last 15 years." That track record makes it a dividend that investors like Buffett can count on.
Returns-driven investment strategy
Chevron has also increased capital spending this year while staying within its budget range. That disciplined approach enables the company to earn high returns.
In Chevron's first-quarter earnings report, Wirth noted, "The company's return on capital employed has been greater than 12% for seven consecutive quarters." The company's strategy of investing in higher-return projects is paying off now.
Breber pointed out on the call that "adjusted first-quarter earnings were up over $200 million versus last year despite 20% lower oil prices." That's partly due to the company's focus on investing more capital into its highest-return opportunities.
A fortress-like balance sheet
Chevron is currently sitting on a cash-rich balance sheet. The company ended the quarter with over $15 billion in cash, giving it a low leverage ratio of 4.4%. Both numbers are well in excess of the company's targets.
Breber noted that the company only needs $5 billion to run and targets a leverage ratio in the range of 20%-25%. That excess cash and low leverage ratio give Chevron a cushion to weather lower oil prices. It will allow the company to continue investing and return cash to shareholders if the industry enters another prolonged downturn.
Gobbling up its stock
Chevron's final financial priority is share repurchases. Breber noted on the call that the company "expect[s] share buybacks to increase to a $17.5 billion annual rate" this year. That puts the rate toward the high end of its $10 billion to $20 billion annual range.
The company intends to repurchase shares toward the upper end of the range when oil prices are higher. It will use its balance sheet flexibility to continue making repurchases during a downturn. Chevron's buyback range positions it to retire 3% to 6% of its outstanding shares each year.
Delivering on its priorities
Chevron generates lots of cash. It allocates that across its four financial priorities:
- Pay a growing dividend.
- Invest in high-return capital projects.
- Maintain a strong balance sheet.
- Repurchase shares.
Those four financial priorities give investors like Buffett plenty of reason to love this oil stock. The company's ability to continue delivering on them should give it the fuel to grow shareholder value over the long term.
