Chevron has been a steady dividend grower for many years, but will the company increase the payment this year in the face of a hurricane force of headwinds?
Collapsing energy prices have pushed down revenue and earnings.
Chevron investors have gone 5 quarters without a dividend boost.
The energy giant Chevron (NYSE:CVX) has been a steady dividend grower for a long time and is a member of the prestigious Dividend Aristocrats, a group of 53 large-cap companies that have boosted payouts for at least 25 years in a row.
Will that enviable record continue in 2015 or will the company, as the result of vastly lower revenue and earnings because of the precipitous drop in energy prices over the last year, be forced to keep the dividend as is or even reduce it? So far Chevron's board of directors has not indicated that a dividend increase is in the works this year. One of Chevron's main competitors, Exxon Mobil (NYSE:XOM), recently announced a 5.8% dividend increase, in spite of the current state of affairs in the industry.
Dividends are us Chevron is one of corporate America's biggest dividend payers. In 2014 the company returned $8.1B to shareholders. Only six others paid out more. The current dividend is $4.28 per share and currently yields about 4.3%.
Over the past decade Chevron has increased the amount of dividends paid by nearly 160%, a compounded annual rate of 10%, handily beating inflation. If you bought shares in June 2005, and held to today without reinvesting dividends, your yield-on-cost is about 11%.
What have you done for me lately? Looking at the past is fine and dandy and is an important consideration for dividend growth investors but the future needs to be divined a bit more in order to answer the title question.
Disconcertingly for Chevron, investors have gone on a selling spree and the stock price has dropped from a high of around $130 to below $100 as I write this. In addition, some metrics, often used to help gage sustainability of the dividend, are in free fall. Quarterly revenue and earnings have decreased by 40% and 50%, respectively, free cash flow is down by $1.5B, and net debt issuance is up by 50% over the past year. One positive factor is that at about 50%, the payout ratio, although higher than last year, is still reasonable.
Take an expanded view Although currently things look bleak Chevron investors should take a much wider, longer, and broader view.
Companies that are reasonably priced, have 5- and 10-year dividend and earnings growth rates greater than inflation, with long-term debt less than equity, possess payout rates less than 60%, and have a relatively high current yield can be expected to keep increasing the dividend and rewarding shareholders well into the future.
Chevron, among a very small group of companies that also includes Exxon Mobil, meets the criteria right now. Valuation indicators (P/E, P/S, and P/B) are well below the market composite and in line with peers. Over the last 5 years the dividend and EPS have grown by a compounded annual rate of 9% and 14%, respectively. A relatively small amount of long-term debt, 22% of equity, and a payout rate of less than 50% indicate that the company has room to bump the dividend even in the event of lower earnings, which are certainly possible considering the current energy price environment. The company also is choosing to cut back on capital spending and that could provide even more room for a boost this year. And not many large companies can match the current yield, which is almost double that of the 10-year Treasury note.
For more on using this criteria please read an earlier article I wrote on this subject.
Other data, including from the latest company SEC filings, show that although revenue is down upstream production is still growing and the downstream business is performing well.
All in all things are not really that bad at Chevron.
Bottom line So although the situation might seem precarious right now my recommendation is to ignore the hype and consider holding, or even buying, shares of Chevron. The dividends will probably keep flowing, and could even be increased this year. My hunch is that the company does not want to get thrown off the Dividend Aristocrats list just yet.