Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low, it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say that these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. Check out last week's selection.
This week, I'll highlight the nation's second largest integrated oil and gas company, Chevron (NYSE:CVX).
Every Chevron shareholders' biggest nightmare
The biggest concern for Chevron and its largest rival, ExxonMobil (NYSE:XOM), is declining energy prices. Weakening global economies could send oil and natural gas prices significantly lower, which would dramatically affect both companies' bottom lines. Lower prices became a reality for both Chevron and ExxonMobil in their most recent quarters. Chevron's average realized price for a barrel of oil and natural gas liquids fell to $94 from $102 in the year prior. For ExxonMobil, lower oil price realizations coupled with higher natural gas price realization lowered year-over-year earnings by $230 million.
The other factor upstream and downstream companies have to keep in mind is maintaining adequate liquidity to make acquisitions, deploy infrastructure improvements, and cover day-to-day expenses. Chesapeake Energy (NYSE:CHK), for instance, went on a buying spree last decade, which positioned it as one of the U.S. leaders in natural gas reserves. However, when natural gas prices fell to decade lows last year, Chesapeake didn't have enough cash to cover its 2013 capital expenditures. In response, Chesapeake was forced to raise cash by selling assets.
But aside from the threat of a severe global recession, there isn't much that stands in the way of Chevron shareholders and big profits.
Chevron's overseas opportunity
To begin with, Chevron's first-quarter profits, while lower compared with last year, point to a major trend in international growth. Chevron's upstream operations saw a 3% profit improvement -- although this was largely due to favorable currency translation -- while its international downstream business delivered 64% profit growth. Part of this was due to the consolidation of Star Petroleum Refining in Thailand, but it's also because of higher realized crack spreads during the quarter.
The demand for energy in emerging markets like China and India is growing at a much faster pace than established markets like the U.S., which makes Chevron a perfectly positioned oil and gas play thanks to its global asset diversification. Chevron is currently developing two liquid natural gas projects in Australia (Gorgon and Wheatstone) that are expected to deliver an initial capacity of 8.9 million metric tons per year. Not surprisingly, Chevron is Australia's largest natural gas asset holder. Just the proximity of this fuel to Southeast Asia and China places Chevron in an incredible position to reap the rewards of its liquid and gas recovery.
... But don't forget its domestic dominance
Chevron's domestic assets and projects are nothing to sneeze at, either! Chevron remains on track to bring two deepwater projects online in the Gulf of Mexico next year and is the second-largest acreage holder in the natural gas-rich Marcellus Shale in Pennsylvania. Unfortunately, that acreage hasn't translated into huge production totals as of yet; then again, weak natural gas prices haven't merited spending large amounts of capital on boosting production.
Another promising acquisition for Chevron and Royal Dutch Shell (NYSE:RDS-A) (NYSE:RDS-B) was the purchase of a combined 700,000 acres in the Permian Basin from Chesapeake Energy for $3.3 billion. The Permian Basin is a liquid-rich formation that should provide quick returns for Chevron and Royal Dutch Shell if they want to cash on higher oil and NGL prices. In addition, the Permian Basin is close enough by rail to Louisiana and the Gulf of Mexico that both companies can benefit by shipping their oil and netting the difference in the Brent crude price compared to the West Texas Intermediate price, minus the cost of shipping.
With the Obama administration intent on reducing America's reliance on foreign oil, I'd look for companies like Chevron to sees benefits in both liquid and gas production over the coming decades.
Gushing dividend growth
However, the real reason we're taking a deeper dive into Chevron today is the company's shareholder-first ethos.
In Chevron's most recent quarter, the company repurchased $1.25 billion worth of its own shares. While this doesn't put money directly into shareholders' pockets, it does reduce the remaining number of outstanding shares and helps to boost EPS and potentially lower the valuation on the company.
More importantly, Chevron announced last week that it was boosting its quarterly dividend by 11% to exactly $1 from $0.90. It also marked Chevron's addition to the Dividend Aristocrats club, as it's now raised its dividend for 25 consecutive years!
Growth in Chevron's payout over the past decade has been nothing short of incredible. The company's payout has increased by 186% over the past decade, and Chevron is currently yielding 3.3% -- a clean 40 basis points higher than its bigger domestic rival ExxonMobil. Furthermore, its payout ratio is only 32% of this year's projected EPS, leaving plenty of wiggle room to boost its dividend in the future without taking precious cash from acquisitions and drilling opportunities.
There are few companies that you can honestly buy for decades and not worry about, but Chevron certainly appears to be one. Chevron's reserves are both asset- and geographically diverse, and the company is well positioned to take advantage of domestic energy growth, as well as rapidly growing emerging market energy demands in Southeast Asia and Eastern Europe. Having generated an average of $11.4 billion in free cash flow over the past three years, and with a quickly growing dividend yielding in excess of 3%, I see no reason Chevron shouldn't be a serious consideration for your portfolio or your retirement account.
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
The Motley Fool has the following options: Long Jan 2014 $20 Calls on Chesapeake Energy, Long Jan 2014 $30 Calls on Chesapeake Energy, and Short Jan 2014 $15 Puts on Chesapeake Energy. The Motley Fool also recommends Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.