Choosing investments for your portfolio will require you to make concessions. Consider Occidental Petroleum (OXY 0.75%), which has grown its quarterly dividend from $0.01 a share in the first quarter of 2021 to $0.22 per share in the third stanza of 2024.
That sounds great if you are a dividend investor, but there's some history here that suggests Chevron (CVX 0.94%) might be a better choice for most income investors.
Occidental Petroleum's coming back from a misstep
The key part of the story missing from the dividend discussion is that Oxy, as Occidental Petroleum is more commonly called on Wall Street, cut its dividend in 2020. It was a rather large cut, too, taking the quarterly payment from $0.79 per share down to just a penny. To be fair, 2020 was a very difficult year for the energy sector thanks to the economic shutdowns used in an attempt to slow the spread of the coronavirus pandemic.
Image source: Getty Images.
But the truth is, that wasn't the only headwind that Oxy was facing. In 2019, it outbid Chevron to buy Anadarko Petroleum. Although famed investor Warren Buffett helped the company complete the transaction, it left Oxy with a heavily leveraged balance sheet right as the energy market crashed.
Simply put, management's growth push left it exposed to the next down cycle in the energy sector, and when it arrived, the dividend was quickly sacrificed. That was the right move for Oxy, but dividend investors probably weren't very happy about it.
To be fair, management has worked hard to get the balance sheet back into fighting shape. The debt-to-equity ratio has gone from around 1.9 times following the Anadarko purchase to roughly 0.6 times today. But that's still a lot higher than the 0.14 times debt-to-equity ratio at Chevron.
OXY Debt to Equity Ratio data by YCharts
Chevron stands above Oxy in important ways
More aggressive income investors might be looking at Oxy's current $0.22 per-share quarterly dividend and thinking there's a lot more room to go before it is back up to the pre-cut $0.79 per share. That's true and, perhaps, getting back to that level is the board's goal.
But Oxy isn't done with its growth plans, either, noting that it just agreed to buy energy company CrownRock, though it is a smaller transaction than the one that ran into trouble back in 2020. Still, Oxy looks like its long-term ambition is to compete with industry giants like Chevron, and it can really only get there via acquisition.
Chevron, meanwhile, is already an industry giant. And as noted, it has a very strong balance sheet. When oil prices plunged during the pandemic, it added leverage so it could maintain its dividend and continue to invest in its business. In fact, at the peak of that industry downturn, Chevron's debt-to-equity ratio was probably around half of what Oxy's debt-to-equity ratio is today. Simply put, Chevron is in a better position to survive through the cycle than Oxy.
The interesting thing here is that Chevron is itself looking to buy another company, Hess. But it isn't going well because of a relationship that Hess has with ExxonMobi. The deal could end up getting scuttled and, at the very least, is likely to be delayed as the three sides try to work through what is a complex issue regarding a co-investment between Exxon and Hess.
The concern about this transaction has left Chevron trading with a 4.1% dividend yield relative to Exxon's 3.3% and Oxy's 1.5% or so. On a yield basis, Chevron clearly wins. But it has also increased its dividend annually for over three decades, which is clear evidence that it knows how to navigate through the energy cycle, something that Oxy can't claim.
So buying Oxy is both a bet that the dividend will keep rising at a rapid clip as the company grows and that it won't make another misstep along the way. That's probably not a bet worth taking for more conservative dividend investors.
Dividend growth is important, but not the end-all and be-all
While it probably wouldn't be a mistake to buy Oxy, per se, it looks like Chevron is a more reliable dividend stock. That remains true even as Oxy has clearly improved its financial position. It's just that Chevron remains a stronger company financially speaking, and it can more easily handle adversity. That's a winning combination in what is a highly volatile sector.
