Chevron (CVX 0.37%) is a U.S.-based integrated energy company with a globally diversified business. It is one of the industry's biggest and best-known companies with two key distinctions being its financial strength and its growing dividend. So far in 2023, Chevron has been a laggard investment, but examining such a short period may not be the best way to evaluate performance.
A lousy year
If you invested $1,000 in Chevron at the start of 2023, it would now be worth just $865 or so. Even if you add in reinvested dividends, which is total return, the figure would be pretty tough to look at, at just over $880. Both of those figures lag behind what you would have if you had invested the same amount in the Vanguard Energy Index ETF (VDE -0.80%), with the stock-only decline leaving you at roughly $910 and the total return improving that to $915.
While Chevron has clearly been a less-than-rewarding investment in the energy patch, it probably isn't the best idea to look at short-term performance when assessing this particular company. Indeed, with 36 years of annual dividend increases behind it and the lowest debt-to-equity ratio of its closest peers, Chevron is clearly built to reward investors over the long term. The goal of the company is to be a desirable investment through the energy cycle, not just in good or bad markets.
CVX Debt to Equity Ratio data by YCharts
That often means making long-term commitments that play out over years, not months. For example, Chevron has been increasingly focused on U.S. shale production. Notably, it recently agreed to buy PDC Energy (PDCE), which is projected to expand its oil reserves by 10% at a low cost of around $7 per barrel. This will support management's plan to continue to grow its production at around 3% per year over the next few years. The company also has a number of investment projects scheduled to come online over the next three years.
With a roughly $50 breakeven point, which includes covering the dividend, Chevron is well positioned to keep rewarding investors through thick and thin. But, if oil should fall below the company's breakeven, it has the balance sheet strength to support both its business and the dividend until oil prices recover, as they historically have time and time again. Chevron is built for consistency.
Think long term
All in all, Chevron won't wow you in energy upturns specifically because it is designed to provide stable results over time. That means somewhat muted results on the upside and, more important in the highly cyclical energy sector, less pain on the downside. But that's exactly what Chevron is trying to give shareholders with its integrated and diversified business model. For this company, you need to pull back and look at the longer term to properly assess its performance.
On that score, over the past decade, a $1,000 investment would have turned into roughly $1,280, or $1,940 with dividends reinvested. The difference between the stock-only and total-return figures is sizable and shows just how important Chevron's reliable and growing dividend has been for investor returns.
But the company really starts to shine when you look at the 10-year performance for Vanguard Energy Index ETF and Devon Energy (DVN 0.19%), a company focused on just energy production. The average energy stock turned $1k into $965 or so, with reinvested dividends improving that to $1,345. Chevron is clearly the winner there. A similar investment in Devon Energy would be worth about $855 today, with dividends increasing that to $1,160. Since Devon Energy is laser-focused on production, its top and bottom lines are almost entirely reliant on commodity prices.
Slow and steady Chevron has clearly won the race over the past decade. And yet, if you look closely at the graph above, you'll see periods where Devon Energy did materially better than Chevron or the average energy stock. This speaks to the nature of that company's business but also to the highly volatile nature of the energy sector. While those brief periods of outperformance might be exciting, Chevron has still proven itself to be the better long-term investment with its slow and steady approach.
For the conservative investor
Given Chevron's business, and the performance results highlighted above, it shouldn't be too shocking that the company is a good option for dividend investors who like to play it safe. Essentially, if you want some energy exposure for diversification purposes, Chevron is a solid long-term holding. It probably won't excite you, but collecting a regular dividend check from a financially strong company isn't something you'll likely be complaining about, either.
