Over the last few quarters, Chevron's (NYSE:CVX) stock has suffered along with the rest of the industry as the days of low-hanging fruit at the start of the great shale boom are over, and a glut of oil and gas continue to flood the global marketplace. To prop up shares and soften the blow to its shareholders, the company has reaffirmed its strong dividend policy. Questions remain about the sustainability of such a strategy as profits continue to sink and earnings fail to cover the payout. If the current trend were to continue, then future dividend hikes could soon be in jeopardy, or at the very least disappointing.

Executive Decision
In its most recent proxy statement, Chevron's executives urged caution about lower oil and gas prices, pleading with investors to be patient as it transitions into a "new normal" of rock-bottom energy pricing.

The company was surprisingly forthcoming in its assessment of the changing marketplace and the limitations it expects going forward:

The days of easy oil are over. Costs to find, develop, and produce oil are increasing. At the same time, demand for oil is flattening and is projected by many to decrease due to a host of carbon-related factors including regulations to stave off global temperature rise, increasing fuel economy requirements, decreasing costs of renewables, and fuel substitution. A 21st century business strategy should reflect and incorporate these factors, emphasizing shareholder value over irrational growth of reserves.

In response to requests for a more robust capital return program to augment shareholder returns, Chevron reaffirmed its commitment to a growing dividend. Despite this, it actually kept the payout rate unchanged for the second quarter, the first such time that has happened in several years.

Still, it appears executives know the score and are going to be focused on supporting the payout. As truly viable opportunities for organic growth and development of proven reserves dry up, the options for propping up the share price are limited.

This changing energy market creates deep investor concern over Chevron's capital investments in high cost, high carbon fossil fuel projects. Increased capital distribution serves to maximize and protect shareholder value; represents a more prudent use of investor capital in the face of growing risks; and allows shareholders to reallocate their investments in alignment with a carbon-constrained world.

Finding balance
Luckily for Chevron, it finances are still in solid shape. Its borrowing capacity and ability to service such debt remains strong. Chevron's costs are slowly coming back within a reasonably sustainable range, with numerous projects winding down over the next couple of years. In the latest quarterly report, the company stated a clear goal of covering both cap ex and dividends entirely out of operating cash flow by 2017.

Dividend growth has certainly slowed recently, as management maintained the second-quarter dividend at its current level of $1.07 per share. Over the last four quarters, dividends have totaled $4.28, compared to $4.00 in the prior four quarters, an increase of only 7%. That is lower than the nearly 10% growth rate that had become the norm over the trailing 5-year period. This makes sense financially speaking, however, as trailing-five-year revenue growth remains a tepid 3.62%. Such growth is unlikely to materially improve over the next couple of years.

With a current dividend yield of around 5% as of this writing, and a still-healthy balance sheet, Chevron appears to be a safe income stock to own. This is especially the case given the fact that oil is unlikely to remain artificially cheap forever. While the latest quarterly payout was greater than net income, a rate event by Chevron's standards, it was not entirely unexpected given the particularly unfavorable mix of higher costs and lower revenues over the last quarter. 

Foolish conclusion
Despite some disturbing secular trends in the oil and gas industry over the last 12-18 months, and Chevron's own earnings slump, there is still hope for investors. Cost reduction and a focus on operating efficiency, along with prudent cash management will be management's main focus to keep the dividend payout ratio in line. This strategy should ensure the viability of future dividend hikes. It is important to note that management fully intends to cover future dividend growth by operating cash flow in the future, but their delivery on that goal is well worth monitoring.