Oil and natural gas prices are volatile, which is why the energy sector tends to go through periods of boom and bust. Those ups and downs can make energy a trying sector in which to invest. Chevron (CVX 1.46%), however, has a plan for riding the peaks and valleys while rewarding investors via a steady stream of dividends.
If you are looking at energy stocks today, you'll probably find this integrated energy giant attractive. Here's why.
Chevron is built for conservative investors
Some companies specifically look to reward aggressive investors. Devon Energy (DVN 2.45%) is a good example of this and it accomplishes its goal by operating under a variable dividend policy. This pure-play energy producer's financial results go up and down with oil and natural gas prices and so too does its dividend. That is not the type of company a conservative, income-focused investor will want to own. Chevron is basically at the other end of the spectrum.
NYSE: CVX
Key Data Points
Chevron increased its dividend annually for 36 consecutive years despite the often dramatic and swift price moves of the commodities it produces. While a deep drop in oil prices will hit Chevron's top and bottom lines just like it does Devon Energy's, Chevron has made it a priority to reward investors with consistent dividends. That requires a very different business model.
The first point to understand is that Chevron is an integrated energy company. That means that it not only produces oil and natural gas, like Devon, but it also owns the assets that move (pipelines) and process these fuels (chemicals and refining). Each of the industry segments has different operating dynamics, with some actually able to benefit from lower oil prices (refining) and others providing reliable cash flows regardless of commodity prices (pipelines). Production assets are more impactful than the other two areas at Chevron, but the diversification helps to lessen the impact of the industry's often large swings.
The next big point in favor of Chevron is its balance sheet. The company's debt-to-equity ratio is a minuscule 0.12 today. That's the lowest among its closest peers and notably lower than Devon Energy's 0.50 or so. The company's financial strength gives it the leeway it needs to survive the hard times.
CVX Debt to Equity Ratio data by YCharts
A perfect example of Chevron's playbook
The interesting thing is that Chevron's 0.12 debt-to-equity ratio is very low today. That is largely thanks to the oil price rally coming out of the coronavirus pandemic, which allowed the company to pay down its leverage. But during the public health crisis, Chevron's leverage nearly doubled, going from around 0.2 times to around 0.35 times in about a year. That's a massive increase in a very short period of time.
CVX Debt to Equity Ratio data by YCharts
Once oil prices started to recover, leading to strong profits, Chevron reduced its leverage. This move basically prepares the energy giant for the next downturn. It isn't a matter of if there is another downswing, but when, given the inherently cyclical nature of the industry. The thing to understand about Chevron is that this is how the company operates. It purposely takes on debt during the tough times so it can continue to fund its business and support the dividend, confident that the subsequent upturn will allow it to get its balance sheet back into tip-top shape again.
For conservative dividend investors who want exposure to the energy sector, Chevron is probably one of the best options around. And with an attractive 4.1% dividend yield today -- noting that the S&P 500 index's yield is a scant 1.4% -- it might be worth a very close look right now.
Chevron is a rock in a stormy sea
To be fair, Chevron's stock price can be volatile given the earnings swings inherent in the energy business. The best time to buy it is often during energy market downturns when the yield can get well above current levels. However, if you are trying to create a diversified income portfolio that will provide a reliable income stream, adding Chevron for the energy slot, even at today's prices, would not be a bad idea. It is built from the ground up to reward investors with a reliable -- and growing -- stream of dividends.
