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Dividend Smackdown: Chevron (CVX) vs. AT&T (T)

It’s that time again. We’re putting two iconic dividend payers in the ring for an old-school Dividend Smackdown.

dow jones stocksThis is a faceoff between energy major Chevron Corporation (NYSE:CVX) and telecom giant AT&T Inc. (NYSE:T), two stocks that have taken more punches than Rocky Balboa of late. But like Rocky, I expect CVX to eventually rally and return a few punches of its own. I’m not sure about AT&T, however.

CVX, like the rest of the oil majors, has taken an absolute beating over the past year. Its share price is down about 23% since late July and has underperformed the S&P 500 by nearly 28%.

T stock hasn’t had the smoothest ride either, for that matter, down about 8% over the same period. But investor sentiment has been particularly sour towards Big Oil following the collapse in the price of crude.

There’s a lot for value investors to like about CVX stock. Its price-to-earnings ratio and price-to-book ratios are sitting near multi-year lows at 10.1 and 1.2, respectively. This is because Wall Street is a little less than enthusiastic about Chevron’s earning power in a low-crude-price environment, but after the beating the stock price has taken, it would seem that the bad news is mostly priced in.

Chevron’s dividend yield, at 4.1%, also makes it one of the highest yielders in the S&P 500. And CVX has been a very aggressive in raising dividends over the past decade, growing its dividend at a 10.2% annualized rate. To put that in perspective, had you bought CVX 10 years ago and held until today, your effective dividend yield today on your original cost would be nearly 11%.


chart (2)

CVX has raised its dividend for 29 consecutive years running, and I don’t expect it to stop the chain any time soon. Chevron’s dividend payout ratio is a very manageable 42%. Even if Chevron shoots air balls for the next several quarters with new projects, its dividend would seem safe for the foreseeable future even if dividend growth slows for several quarters.

CVX recently suspended its share buyback program, which is a letdown but also a completely reasonable defensive move given its difficult operating environment.

chart (1)

Chevron has had a harder time ratcheting down its capital expenditures than some of its Big Oil peers. Unfortunately for CVX, several of its big projects — including major liquefied natural gas projects in Angola and Australia and multiple platforms in the Gulf of Mexico — are at stages that require a lot of capital spending that cannot be postponed.

That’s going to hurt profitability and may force Chevron to borrow a little more heavily than usual. But with a debt-to-equity ratio of just 18%, CVX has the ability to borrow pretty heavily without putting its long-term future at risk.

Is Chevron my favorite Oil Major? No, it’s not. I’d prefer Exxon Mobil Corporation (NYSE:XOM) domestically, along with the European oil majors. But this Dividend Smackdown isn’t between Chevron and Exxon. It’s between CVX and T stock.

And AT&T faces some major issues of its own.

Price competition in mobile is brutal, and rival T-Mobile US Inc (NYSE:TMUS) fired a shot across the bow two years ago when it eliminated carrier subsidies for handsets and introduced unlimited, no-contract data plans. AT&T and Verizon Communications Inc. (NYSE:VZ) have had to scramble to compete on price. But with smartphones requiring ever-higher amounts of bandwidth, AT&T’s capital spending has been higher than ever.

Lower margins and higher capital spending are a rough combination, and one that hasn’t gone unnoticed on Wall Street. T stock price has drifted sideways for nearly three years, completely missing the monster rally of 2013 and 2014.

T stock sports a very nice dividend at 5.6%, but its payout ratio has been above 100% in three out of the last four years, and dividend growth has been slowing down dramatically. Over the past year, AT&T barely squeaked out a 2% dividend hike.

The Decision

I’ll summarize CVX and AT&T’s respective predicaments like this: Chevron has major unavoidable capital expenditures over the next year or two that will sap profitability, but after that its situation should improve. With AT&T, there is really no light at the end of the tunnel. I don’t see mobile service getting any less competitive on price, and T stock faces long-term threats to paid TV and internet service businesses too.

Dish Network Corp (NASDAQ:DISH) potentially just launched a game-changer with its internet-based TV offering, Sling TV, and Google Inc (NASDAQ:GOOG, NASDAQ:GOOGL) is rolling out its Google Fiber service in more American cities every year.

The winner of this Dividend Smackdown is CVX. Leave T stock to ice its bruises.

Charles Lewis Sizemore, CFA, is the chief investment officer of investment firm Sizemore Capital Management. Click here to receive his FREE weekly e-letter covering top market insights, trends, and the best stocks and ETFs to profit from today’s best global value plays. As of this writing, he was long XOM

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Article printed from InvestorPlace Media, https://investorplace.com/2015/03/dividend-smackdown-chevron-cvx-vs-att-t/.

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