No Need To Freak Out About Chevron's 'Frozen' Dividend
This $1.07 dividend will be the fifth payment in a row at that level, causing some dividend growth investors to worry about a "frozen" dividend.
While this was a surprise, it isn't an unprecedented event for Chevron shareholders, and shouldn't be a cause for concern.
Chevron's forward yield is still higher than Exxon Mobil's, even after Exxon's increased payout, and remains appealing in a low yield market.
Chevron Corp. (NYSE:CVX) released their much anticipated dividend declaration after the market close on April 29th. I say "much anticipated" because recent history has had Chevron announcing a dividend increase for each of the last five second quarter dividend announcements.
With the price of crude trading as low as the mid-$40's in recent months, dividend growth investors have speculated on how much of a raise Chevron would be giving with their scheduled increase. It turns out there won't be an increase as expected, as the company announced a payment of $1.07 for the 5th consecutive quarter.
While this has taken some dividend growth investors by surprise, I don't think it is anything long term investors should lose any sleep over, as the company has a track record of withholding increases during times of depressed crude prices.
A Look At Recent History
As you can see in the chart below, when prices collapsed below $25 in the late 90's, Chevron "froze" dividend payouts at $0.305 from the Q1 of 1998 to Q3 of 1999; at $0.325 from Q4 of 1999 to Q3 of 2001; and at $0.35 from Q4 of 2001 to Q2 of 2003.
Then, as crude prices rose steadily through the 2000's, Chevron steadily raised dividends, sometimes more than once per year, until the "Great Recession" of 2008-09, when crude prices dropped by more than 50%. This large price drop resulted in another "freeze", when a $0.65 dividend was paid for five consecutive quarters, from Q2 of 2008 through Q2 of 2009.
Looking at the more recent history you can see how the recent drop in oil prices compares with the drop in 2008-09.
A plunging oil directed rig count and an apparent plateauing of crude production from the United States means we've likely seen the bottom in oil and prices should continue higher into the second half of the year.
According to Chevron's recent 2015 Security Analyst Meeting, the company is guiding for the dividend being covered by cash flow in 2017 with crude prices at just $70.
(click to enlarge)
With a 40% reduction in U.S. upstream investment (as of February 2015) leading to lower production in the second half of the year and Brent Crude prices having already rebounded into the $60's, I think the $70 level needed for 2017 will be easily reached. If fact, I wouldn't be surprised if that number is breached by the end of this year.
With Chevron shares currently trading near $112, the $1.07 per share quarterly payment is providing an annualized dividend yield of around 3.8%. This compares quite favorably against Exxon Mobil (NYSE:XOM), which has a 3.3% forward yield based on the newly declared quarterly payout of $0.73. The short term "freeze" is one of the side effects of investing in a higher paying Chevron over a more conservative Exxon. The ride is bumpier, but you are being paid more over the long run to endure it.
Although dividend growth investors may be disappointed by the lack of an increase this quarter, I suspect as crude prices continue to recover over the coming months, Chevron management will once again consider the dividend and will reward shareholders with an increase in the second half of the year.
So take a deep breath, relax, and don't freak out. Everything is going to be just fine.
Additional disclosure: I am a Civil Engineer by trade and am not a professional investment adviser or financial analyst. This article is not an endorsement for the stocks mentioned. Please perform your own due diligence before you decide to trade any securities or other products.