Chevron Stock: Don’t Expect Any More Quick Gains

Dividend Stocks

The stock market rally off the March lows has certainly been impressive, especially in light of the uncertainty from the novel coronavirus. But it’s been generally the highest quality companies, like Chevron (NYSE:CVX), that have seen the strongest gains. Chevron stock is up a sizzling 61% since mid-March.

Chevron's Strong Cash Flow Makes the Fat Dividend Yield Very Attractive

Source: Jeff Whyte /

Granted, unlike others like Amazon (NASDAQ:AMZN) and Microsoft (NASDAQ:MSFT), Chevron is still down for the year. But it is not necessarily too bad. The return is about -26%. To put things into perspective, Occidental Petroleum (NYSE:OXY) is off 66% and Marathon Oil (NYSE:MRO) down 59%.

While the coronavirus has had the most impact on the price of crude, there have been other factors at work. Last year, there was substantial production from shale operators. Then there was the price war that erupted from a dispute between Saudi Arabia and Russia.

Yet with the plunge in the demand in oil and the spike in supply, this has meant drastic changes in oil policies. OPEC has since agreed to greatly reduce production. There have also been similar efforts in the U.S. and other countries.  Such efforts will certainly make a difference.

And as reopening of economies across the world, there has been a pickup in oil consumption.  In fact, with the oil price at low levels, this has been another stimulant for demand.

So, in light of all this, it should be no surprise Chevron stock has been in the bull mode.

However, this does not mean that somehow there is an all-clear sign for the energy markets. After all, the price of West Texas Intermediate is still only about $29. Consider that to the lowest point of break-even for top-producing fields is $30 or so.

What’s more, the U.S. economy – and perhaps even the global economy – may not have a V-shape recovery. Rather, it could be sluggish, which will make it tough for crude prices to rise. Last week’s gloomy speech from Federal Reserve Chairman Jerome Powell definitely highlighted this.

The Dividend and Balance Sheet

Another key for Chevron stock is that the company’s balance sheet is solid. Last year, the company had begun a major cost-cutting effort and was being more restrained with its capital budget. It’s also important to note that Chevron’s net debt ratio is about 15%, which is below ExxonMobil’s (NYSE:XOM) and BP’s (NYSE:BP).

In other words, there is lots of potential borrowing power.

But of course, Chevron will ramp up its efforts to conserve cash. This will include suspending stock buybacks and reducing costs by another $1 billion this year. As for the capital budget, it has been reset to $14 billion, down from the range of $19 billion to $22 billion.

According to CEO Mike Wirth, the “No. 1 financial priority” is the dividend on Chevron stock. It is currently 5.8%. In fact, the company increased the payout for 33 consecutive years, with the latest increase coming in January (up 8.4%).

True, other major oil companies like Royal Dutch Shell (NYSE:RDS.B) have cut their dividends. But again, Chevron is in strong financial shape and should be able to maintain its payout

The Bottom Line on Chevron Stock

Going forward, Chevron will be in a position to benefit from consolidation in the industry. There will not only be fewer competitors, but the company will be able to buy assets at discounted valuations.  This definitely bodes well for the long term.

And yes, there should be the support from the dividend yield. Although, this does not necessarily mean that we will see continued standout capital gains – at least in the near term. For the most part, much of the good news appears to be already baked in. According to UBS analysts, the price target is roughly $95, which assumes only 5.6% upside.

However, if you are looking for an attractive yield play, Chevron stock is certainly interesting and still represents a good value now.

Tom Taulli (@ttaulli) is the author of various books on investing and technology, including Artificial Intelligence BasicsHigh-Profit IPO Strategies and All About Short Selling. He is also the founder of WebIPO, which was one of the first platforms for public offerings during the 1990s.  As of this writing, he did not hold a position in any of the aforementioned securities.

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