On Jan. 25, 2023, Chevron (CVX 2.16%) announced its 36th consecutive annual dividend raise when it boosted its dividend by 6%. Investors were hoping for another raise in the Feb. 2, 2024, fourth-quarter earnings release -- and they got just that.
Chevron announced an 8% dividend raise lifting the payout to $1.63 per share per quarter -- or $6.52 per share per year.
Here's a look at Chevron's history of dividends, why this raise is meaningful, and why the dividend stock is a good value.
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Big oil, big-time raises
Companies with a long track record of dividend growth will sometimes make minuscule raises just to keep the streak alive. Chevron is not doing that.
Five years ago, its quarterly dividend was $1.19 per share. Now at $1.63, it is up 37% in that time period. Chevron has increased its dividend at more than double the rate of ExxonMobil and more than the other oil majors.
CVX dividend data by YCharts.
Chevron's dividend has been a key part of the reason it hasn't been too bad an investment over the last decade. The energy sector did very well in 2021 and 2022. But zoom out, and it is flat over the last 10 years despite the S&P 500 nearly tripling.
The stock is only up 36.4% over the last decade, largely helped by its strong performance over the last three years. However, once you factor in dividends, an investment in the stock would have more than doubled your money during that period.
It still would have been better to invest in the broader market. But when you consider the performance of the broader industry, how the oil and gas industry crashed in 2015 and then again in 2020, and the outperformance by big tech stocks to carry the S&P 500, Chevron's 107.5% total return over the last decade is solid.
The pillars that make Chevron a quality investment
There are two ways to grow earnings per share (EPS). The first is to increase earnings through organic growth, cost reductions, mergers and acquisitions, and the like. The second is by repurchasing stock and reducing the outstanding share count.
Chevron just reported its second-best year in diluted EPS over the last decade thanks to oil prices, cost reductions, operational improvements, and a strong overall portfolio both upstream and downstream. But another factor was its buybacks.
The company spent $14.9 billion in buybacks last year and $11.3 billion in 2022. That's $26.2 billion combined in just two years, which is 9.3% of Chevron's market cap.
And then, you have to factor in dividends. Management paid $22.3 billion in dividends in 2022 and 2023. So all together, it spent $48.5 billion on dividends and buybacks over the last two years, or 17.2% of its market cap.
Chevron's improving fundamentals, strong dividend, and sizable buybacks all play into why it is a good value. The stock has a price-to-earnings (P/E) ratio of just 11.3, far below the S&P 500 average. In fact, Chevron's earnings could be cut in half, and it would still have a lower P/E ratio than the S&P 500's 26.9.
Another key element of Chevron's value is its balance sheet. On the 2023 fourth-quarter earnings call, chief financial officer Pierre Breber said:
In terms of how we manage the balance sheet, I mean, the first thing is, we start with our breakeven. So, what it takes -- the oil price it takes to cover our capex and dividend -- that was in the low 50s last year. And so, we see mostly upside. And that's why we had record share buybacks last year, almost $15 billion, 5% of our shares outstanding, because we're built for a price well below where we currently are. We've also done it while maintaining a strong balance sheet -- our net debt ratio of 7%.
In other words, the company isn't just buying back stock for the sake of it. It is doing so because the balance sheet is already in such good shape and the portfolio has a low cost of production -- so the best use of cash is to buy back stock.
Chevron offers plenty of upside potential
Chevron checks all the boxes for a quality dividend stock. It is steadily growing its production -- mainly through low-cost plays. It has the balance sheet and track record to support future growth. It is an industry-leading company with diverse geographic exposure, as well as significant downstream assets. And it is a bargain-bin stock with a low valuation, which is impressive considering the stock is up 74.9% over the last three years and has beat the market during that time period.
If you're going to invest in the oil and gas industry, you want to find a company that can profit during an expansion and not go belly up during a downturn in the cycle. Chevron is that kind of company. Its 4.3% dividend yield provides a sizable passive income stream for investors who can stomach the volatility of the oil and gas industry.
