The world is trying to shift away from dirtier energy sources, such as coal and oil. However, it's likely to be a long transition. Oil and natural gas will both be needed for decades to come, as the most likely energy strategy is an "all of the above" approach.
Every investor should probably have some exposure to the energy sector. That's the foundational reason why you should consider adding Chevron (CVX +0.30%) to your portfolio. Here are three company-specific reasons why.
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1. Chevron is diversified
The energy sector is volatile by nature, with oil and natural gas prices rising and falling regularly. You could focus on a narrow niche of the industry, but most investors will be best served by a company with a diversified portfolio of assets that provide exposure to the entire energy value chain. That's what integrated energy companies like Chevron do.
Chevron is best known for its oil and natural gas production, which falls into the upstream segment of the industry. However, it also owns energy infrastructure assets, such as pipelines, which help move oil and natural gas around the world.
That's the midstream. It also owns chemical and refining businesses that operate in the downstream segment of the industry. These businesses process energy into the products that actually get used, like gasoline.
Each segment of the industry operates a little differently through the energy cycle. The best example of the benefit is that low oil prices put pressure on upstream producers but reduce costs in the downstream segment, where oil is a key input into the production of other products. From a foundational perspective, integrated Chevron has an attractive business model.
2. Chevron has an attractive yield
Chevron's dividend yield is currently 4.1%. That's well above the S&P 500 index's (^GSPC +0.71%) 1.1% yield and the 3.3% yield of the average energy stock. Chevron clearly has an attractive yield on an absolute level.
Chevron, however, doesn't have the highest yield among its closest integrated energy peers. That title goes to TotalEnergies at around 5.9%. However, Chevron does have an over 30-year streak of annual dividend increases behind it. That's second in the sector to ExxonMobil's over-40-year streak, but Exxon's yield is only around 3.1%. All in, Chevron is a reliable dividend stock with an attractive yield that stands out from its peers.
NYSE: CVX
Key Data Points
3. Chevron's balance sheet is built to last
Chevron has managed to keep increasing its dividend year in and year out in the highly volatile energy sector for several reasons. The diversified business model is one, but the strength of its balance sheet is also important. The company's debt-to-equity ratio is currently 0.22x. That would be strong for any business and is the second lowest in Chevron's peer group, behind Exxon's 0.16x.
Having low leverage allows Chevron to take on debt during oil downturns, enabling it to continue supporting its business and dividend. When oil prices recover, as they always have historically, leverage is reduced in preparation for the next downturn. Essentially, Chevron's well-structured business is built atop a rock-solid foundation.
Chevron is a good pick -- most of the time
Chevron can't avoid the impact of oil prices on its business. No energy company can. So oil downturns tend to lead to revenue and earnings declines, as well as to stock-price weakness.
You'll get the best "deal" on Chevron's stock if you buy during an oil downturn. However, given the company's strong business, attractive dividend yield, and rock-solid finances, it's a good energy stock to consider almost all the time.
