Chevron stock (NYSE:CVX) is down over 35% in 2020. That’s actually the good news.
Prior to Chevron CEO Mike Wirth announcing a series of cost-cutting measures the stock was down more than 55%. For investors, buying Chevron stock is all about sentiment regarding the safety of its dividend.
The company is reducing capital expenditures by 20% (from $20 billion to $16 billion). Wirth also announced that Chevron will suspend its $5 billion share buyback program. Both of these steps are good indications that current CVX shareholders should feel good about the safety of the company’s dividend, at least for 2020.
The Forecast for Oil Prices is Fluid
For crude oil prices to stabilize, the supply/demand equation must be adjusted. There is reason for tepid optimism. The U.S. Energy Information Administration (EIA) forecasts that Brent crude will average $43 per barrel for all of 2020. However, that is based on prices averaging $37 per barrel in the second quarter. At the time of this writing, Brent crude was slightly above $32 per barrel.
While a price of $43 for Brent crude would be far below last year’s average price of over $60 per barrel, it would be in the area where oil companies “need” it to be in. But forecasting oil prices is more a guess, and maybe a wish, until the economy begins to come back.
Chevron stock presents a classic risk/reward scenario for investors. If the economy accelerates with an explosion of pent-up demand, buying CVX stock at current levels will pay off handsomely. On the other hand, if the muted demand forecast holds up, it’s less certain that Chevron would be able to maintain their current dividend at oil priced below $40 per barrel.
Chevron Stock Has a Safe Dividend in 2020
Chevron has already announced a dividend increase for 2020. That made it 34 consecutive years of dividend growth. In an interview on CNBC’s “Squawk Box”, Chevron CEO Mike Wirth reminded his interviewers that Chevron has not cut its dividend since 1934. Said Wirth, “Our dividend is our number one priority and it’s very secure.”
As InvestorPlace contributor Mark Hake points out, the $5 billion the company was going to spend on its buyback program covers over half of the projected $9 billion dividend. And the company already paid out the first of its quarterly dividends in March before the cost-cutting initiatives were announced. Dividend Aristocrats like Chevron understand the disastrous message a dividend cut sends. The company’s balance sheet is strong enough to weather the current storm.
But every forecast comes with assumptions. And in the case of Chevron, those assumptions will always be determined by the laws of supply and demand.
The Supply/Demand Puzzle is Not Easy to Solve
Demand will return, but it’s impossible to know at this point how much and how soon. Morgan Stanley (NYSE:MS) is forecasting that a maximum of 50% of U.S. workers being allowed back in the office this summer. The firm went on to forecast that current social distancing guidelines may remain in place, at least in some extent, until spring of 2021.
But does that mean states that are currently under “shelter in place” guidelines will continue to be in that state. If policies loosen up, what does that look like?
There’s a reason why an event is unprecedented. There is no playbook that we can fall back on. That’s why it may be more helpful to look at the supply end of the equation.
The price of oil came off of its lows the week of March 30 on hopes that the current price war between Saudi Arabia and Russia was near a resolution. But it would seem that this is becoming a question of when and not if. The oil markets are looking at a situation where demand will not “normalize” until late in the third quarter. Even then, it will be at lower levels. Without a substantial cut in output, there will be a supply glut. After all, there are only so many place you can store oil once it’s out of the ground.
Hold Off on CVX For Now
It’s hard to tell value investors to pass on the opportunity to buy a Dividend Aristocrat at bargain prices. But until the market has more clarity regarding the strength of demand, oil prices are likely to remain volatile and may still have further to fall. In that scenario, the dividend that investors have come to expect would be in jeopardy.
Chevron still has a buy rating and its 12-month price target suggests it could make it back to January 2020 levels. And if the economic outlook looks better in the third quarter, Chevron stock should still be available at a good price. There’s no need to chase it right now.
As of this writing, Chris Markoch did not hold a position in any of the aforementioned securities.
