Dividend Aristocrats In Focus Part 6: Chevron Corporation (CVX)

When these projects are fully on-line, they will start contributing cash flow of their own, and will no longer require capital expense to build.

Chevron’s earnings are more volatile than most Dividend Aristocrats because of its reliance on oil prices. This makes earnings-per-share growth a poor gauge of the company’s long-term success. The company’s dividend growth and book-value-per-share growth over the last decade are shown below:

– Dividend growth of 9.4% a year

– Book-value-per-share growth of 11.2% a year

Chevron has managed to compound shareholder wealth at impressive rates over the last decade – over a wide variety of economic conditions. The company’s management has excellent capital allocation skill.  Chevron has repurchased around 2% of its net shares outstanding a year over the last decade. These repurchases are in addition to large dividend payments.

Going forward, I expect Chevron to grow its per share value at around 5% a year. Growth will come from production increases, efficiency improvements, and share repurchases.  The company is expecting volume growth of 0% to 4% a year over the next several years.


Source:  Chevron September 2016 Investor Presentation, slide 12

Shares are not currently being repurchased as low oil prices hurt cash flows. I expect share repurchases to resume when oil prices rise. Halting share repurchases helps the company conserve cash for dividends and capital expenditures during this difficult time.

Competitive Advantages & Recession Performance

Major oil corporations get massive government subsidies because energy production is a ‘national interest’. The largest oil corporations (like Chevron) have a history of working with the United States government. Chevron has a significant and lasting competitive advantage by having influence over and relationships with the most powerful organization in the world, the United States government.

In addition to its government based competitive advantage, Chevron is also a low-cost producer of oil and natural gas. Chevron’s large size allows it to invest in the largest and most profitable oil and gas ventures. Chevron regularly partners with other major integrated oil and gas corporations to tackle extremely large projects together; spreading capital expenditures over several companies and sharing in the rewards. This reduces the risk of the company’s portfolio while still taking upside in projects throughout the world.

In short, Chevron has the connections and size to take on the largest and most profitable oil and gas projects, both upstream and downstream.

The last time oil prices fell precipitously was the Great Recession; in 2009. Chevron’s earnings-per-share through the Great Recession and subsequent recover are shown below:

– 2007 earnings-per-share of $8.77

– 2008 earnings-per-share of $11.67 (high at the time)

– 2009 earnings-per-share of $5.24 (recession low)

– 2010 earnings-per-share of $9.48

– 2011 earnings-per-share of $13.44 (new high)

Recent oil price declines have been even more severe. Still, the company is committed to paying its dividend.  Chevron shareholders should not expect a dividend cut.

Chevron is still one of the most conservatively financed large oil corporations, as the image below shows.


Source:  Chevron September 2016 Investor Presentation, slide 15