If you had to pick an energy stock to buy right now, Chevron (CVX 0.36%) has a lot of positives going for it. But at the end of the day, the real driver of the company's financial results and stock performance is going to be the price of oil and natural gas. That's a complication that investors need to understand before buying this (or any) energy stock. Still, there are reasons to like Chevron versus its peers right now, as well as reasons why you wouldn't want to buy it. Here's what you need to know to make the final call.
Chevron has an attractive yield
If you were to pit two integrated energy majors in a head-to-head fight, the most obvious would probably be between Chevron and fellow U.S. energy company ExxonMobil (XOM 1.08%). They are both integrated, they are both U.S. based, and they are both largely sticking with their oil and natural gas focuses (European peers have been more aggressive in adding clean energy to the mix).
NYSE: CVX
Key Data Points
So how do these two stack up? Using dividend yield as a rough proxy for valuation, Chevron's 4.2% yield is far more attractive than Exxon's 3.3%. That's a pretty big difference on a percentage basis. Historically speaking, both stocks have had higher yields during oil downturns, but Exxon's yield is particularly low today, as the chart below shows. That makes Chevron a better income play, of course, but also suggests that it is the more attractive of the two stocks in terms of valuation.
XOM Dividend Yield data by YCharts
Note that both companies have increased their dividends annually for decades, so they are each reliable dividend payers. Exxon's 41-year streak is longer, but it is hard to complain about Chevron's 36 years of annual hikes. This segues nicely into another interesting comparison point.
Strong and stronger
One of the key reasons why Chevron and Exxon have such impressive dividend histories is that they have strong balance sheets. In short, they take on debt when oil prices are low so they can support their businesses and continue to pay their dividends. When oil prices recover, as they always have before, the companies reduce their leverage in preparation for the next industry downturn. But Chevron stands above Exxon today when it comes to leverage, with a debt-to-equity ratio of 0.12 versus Exxon's 0.18.
XOM Debt to Equity Ratio data by YCharts
While that's not exactly a huge difference, it does mean that Chevron has more financial leeway than Exxon when it comes to dealing with adversity. For conservative investors, the mix of a higher yield and a stronger financial foundation will probably make Chevron the better pick right now (assuming you want to buy an energy stock).
From a longer-term perspective, however, waiting for an industry downturn would probably be the best choice. At that point, investors will be questioning Chevron's ability to maintain its dividend despite a strong history of doing just that (and the whole balance sheet thing). So, despite being relatively attractive today, if you like buying stocks on the cheap, you have probably missed out here. Given the cyclical nature of the oil sector, though, you'll eventually have another opportunity. But -- and this is important -- you will have to be willing to buy when most other investors are running scared. That can be a tough thing to do.
Relatively attractive, but not cheap
It would be hard to argue that Chevron is cheap on an absolute basis today, so value-focused investors have probably missed out this time around. The best time in recent memory to buy the stock would have been during the worst of the COVID downturn. That said, Chevron does look relatively attractive compared to its closest competitor, Exxon. If you are looking to add an energy stock to your portfolio, Chevron is a well-positioned company with a strong financial foundation and great track record of rewarding investors. Just go in knowing that while it may be relatively inexpensive, it is not historically cheap.
