The inability of the company to generate positive free cash flow in the last few quarters could be a matter of concern to investors.In the chart below, I have put together the total cash flow from operating activities, the capital expenditures, and the free cash flow for the last six quarters.
However, since maintaining and growing the dividend is the company’s number one financial priority, it can fund the dividend by taking on additional debt, divesting assets, and drawing down its cash balance.
Chevron had cash and cash equivalents of $8.56 billion at the end of the first quarter, and total debt of$42.34 billion. Furthermore, the company has also suspended its $1.25 billion quarterly share buyback to conserve cash.
Also, the company expects to reduce capital expenditures in 2017 by about $4 billion due to completion projects under construction. According to the company, its efforts are focused on improving free cash flow, and it is controlling its spend and getting key projects under construction online, which will boost revenues.
Source: 2016 1Q Earnings Conference Call Presentation
Valuation
Since the beginning of the year, CVX’s stock is up 13.2% while the S&P 500 Index has increased 0.6%, and the Nasdaq Composite Index has lost 5.4%. However, since the beginning of 2012, CVX’s stock has lost 4.3%, in this period, the S&P 500 Index has increased 63.6%, and the Nasdaq Composite Index has risen 81.8%.
CVX’s stock is trading at a price to book value ratio of 1.25. The forward price-to-earnings ratio is at 22.19. The price-to-sales ratio is at 1.48, the Enterprise Value/EBITDA ratio is low at 12.35, and the PEG ratio is also low at 1.13.
In addition, CVX’s Return on Capital parameters have been much better than its industry median, and its sector median, as shown in the table below.
Source: Portfolio123
Summary
Chevron Corporation (NYSE:CVX) reported an adjusted earnings-per-share loss in the in the first quarter of 2016. Nevertheless, I believe that the company is poised to achieve higher price appreciation when oil prices recover than that of other super-major oil & gas companies due to its bigger historical upstream contribution.
Oil prices will eventually recover sooner or later. Commodities prices are moving in cycles, and lower capital expenditures on exploration and production will eventually cause oil prices to rebound.
While waiting for a significant rebound in the price of oil, investors can enjoy the generous high dividend currently yielding 4.20% a year. According to the company, its number one financial priority is to maintain and grow the dividend and it has a strong balance sheet for precisely transition times like this.
Disclosure: This article is originally published on Sure Dividend by Arie Goren.
