Should You Buy Or Sell Chevron (CVX) Stock? 3 Pros, 3 Cons

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Chevron (CVX) is America’s second largest oil company. It is one of the 30 stocks that make up the Dow Jones index. In 2000, it acquired Texaco to solidify its place among the titans of America’s energy industry.

Chevron CVX

CVX stock has been one of the market’s top performers in recent years. Aided by the bull market in oil since the turn of the century, Chevron shareholders have had a great ride. But since oil started to fall, things have turned more sour. CVX shares are down by 22% in the last year, and about a third since 2014. Is this a good chance to buy the dip, or is it wise to stay on the sidelines?

Stock Pros

CVX Remains Solidly Profitable: It’s been a terrible, awful, good-for-nothing year for energy companies. There have been numerous bankruptcies among the smaller oil and gas companies. Even the majors have taken hits. Most of the large integrated multinational firms are now unprofitable or only making the tiniest of profits.

Look at the competitive landscape. BP p.l.c. (BP) lost money last year, as did ConocoPhillips (COP). French oil giant Total (TOT) was only marginally profitable, and it currently trades at around a 100 PE ratio. Only CVX and Exxon Mobil (XOM) remain firmly profitable, coming with 18 and 16 PE ratios, respectively. In this difficult oil price environment, it makes sense to stick to companies that are still turning a solid profit.

The Dividend Yield Is Increasing: Chevron stock currently pays a $4.28 dividend per year, which amounts to a more than 5% yield at the current price. Over the past 20 years, up until this most recent bust, Chevron had never yielded more than 5%. Even in the 2008 crisis, the yield never exceeded the mid-4s. The last time Chevron stock rewarded investors with a dividend yield this high was back in 1991.

Furthermore, CVX has a track record of 27 consecutive years of dividend increases, making it one of the small group of “Dividend Aristocrats” that have raised dividends 25 or more consecutive years. The streak is in danger as the company is overdue for a dividend increase at this point. It remains to be seen if management can raise in this troubling oil price environment.

Gorgon Coming Online: Chevron has spent countless tens billions of dollars over the past couple of years on new project development. The biggest of these, the Gorgon gas project, is just coming into production now. Gorgon is an undertaking to take stranded gas, for which there is little demand in western Australia, and use LNG shipping to send it to eager Asian markets.

To give a sense of the gravity of this project, at the peak of activity, Gorgon created roughly 6,000 construction jobs. A 2009 public environment report about the project estimated that Gorgon would add A$64 billion ($44 billion) to the Australian GDP figure. And the good news for CVX stock is that the major building phase of the Gorgon project is just about completed.

Now the A$54 billion ($37 billion) project was commissioned at the end of December. After the massive investment over the course of the past few years, Chevron can finally start receiving much needed cash from the gigantic outlay. While profitability from Gorgon would be somewhat diminished if the reduced energy price environment continues, the customers are largely located in eastern Asia, where there is less natural gas excess and better pricing for imported LNG.

Stock Cons

Low Energy Prices: The continued low prices of oil and natural gas are a massive headwind for Chevron. This is a company that had produced more than $10 per share of EPS over each of the last four full years. For the trailing four quarters, CVX has only produced $4.60 of EPS, a more than 50% decline from its average in recent years. Revenues are down roughly 38% year over year.

Profitability ratios have also gotten hit hard. The company traditionally earns a return on its equity exceeding 20%. This has fallen to 5.3% in the most recent quarter, and was actually only 1.5% in the previous quarter. This indicates the company may actually become economically unprofitable if oil prices slip much farther from here. Gorgon coming into production should help here, still, the company’s profitability has taken a massive beating.

Dividend May Be In Trouble: The dividend is one of the company’s best features, but it may also turn into a con. That may seem like a paradox. However, it does actually make sense.

CVX stock is frequently owned by defensive investors precisely because it offers such a rock-solid yield. With a top tier AA credit rating and the long track record of boosting the dividend, it is a stock that the so-called widows and orphans can safely hold for the reliable ever-increasing income stream.

Should something happen to that yield, shares would likely be sold in droves by investors who felt betrayed. Chevron hasn’t been able to deliver the sort of dividend increase that investors are accustomed to. Lately, management has just been emphasizing that the dividend is safe for the time being. However the company is taking on debt — $5 billion over the past year alone — to fuel new capital projects along with the dividend. If push comes to shove, the dividend wouldn’t be secure.

Shares Are Still Fairly Expensive: CVX stock currently trades at a P/E ratio roughly in line with the broader S&P 500 index. Given that the market as a whole has brighter prospects than Chevron this year, you might think Chevron should trade at a discount to the stock market as a whole. Oil companies often trade at below market P/E ratios, and that is even when oil isn’t in a crisis.

With the dividend potentially in danger, and the company’s earnings down by more than half over the past year, it is easy to see how CVX stock could fall further. Chevron shares reached a low of $69.58 last fall, and despite oil continuing to plunge since then, Chevron has mounted a major rally. The market seems to be pricing a major rebound in crude oil into CVX shares. If that recovery doesn’t come quickly, it seems likely that CVX stock would fall again.

Verdict

Chevron is one of America’s best blue chip companies. However, there’s a time and a place for everything, and this is not Chevron’s moment. With oil continuing to decline, the dividend potentially in danger, and earnings showing a grim picture for the time being, there are better places to invest your funds.

As of this writing, Ian Bezek owned shares of XOM stock. You can follow him on Twitter at @irbezek.

Ian Bezek has written more than 1,000 articles for InvestorPlace.com and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek.


Article printed from InvestorPlace Media, https://investorplace.com/2016/01/should-you-buy-chevron-cvx-stock-3-pros-3-cons/.

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