The energy sector has been among the market’s worst performers over the past few years. The Energy Select Sector SPDR ETF (XLE) is down 40% year-to-date, while the S&P 500 Index is now up 7% for the year.
Chevron Corporation (CVX) is a major component of XLE. It is also a popular stock among retail and institutional investors such as Carlson Capital. Chevron stock has declined 30% year-to-date, as the combination of low energy prices and weak demand due to the coronavirus pandemic has dealt the entire sector a major blow.
But we view Chevron’s decline as temporary, with long-term growth potential even in an environment of low oil and gas prices. The stock also has a high dividend yield of 6%, and the company has increased its dividend for over 30 years. As a result, we view this Dividend Aristocrat favorably for long-term dividend growth investors.
Short-Term Challenges, Long-Term Returns
Chevron has been hit hard by the extremely weak business environment to start 2020. Excess global supply has led to weak energy prices, while the coronavirus pandemic has resulted in lower demand for fossil fuels. All of this has led to poor results for Chevron through the first half of 2020. In late July, Chevron reported financial results for the second quarter. Due to the impact of the pandemic on the global demand for oil, production fell 3% over last year’s quarter while the average realized oil price plunged from $57 to $20. As a result, Chevron switched from a profit per share of $1.77 in the year-ago period, to a loss per share of -$1.59.
Despite the extremely weak results to begin 2020, Chevron still has a positive long-term outlook. The company has invested heavily in new projects over the past several years, which has given way to production growth. For example, Chevron grew its output by 5% in 2017, 7% in 2018 and 4% in 2019. It had expected to grow its output by 3%-4% per year until 2024, and while the pandemic has disrupted its growth trajectory this year, it should return to production growth once the pandemic ends.
We expect the pandemic to subside from next year and Chevron to return to growth thanks to its sustained growth in the Permian Basin and in Australia. Chevron has more than doubled the value of its assets in Permian in the last two years thanks to new discoveries and technological advances. Separately, Chevron’s recent $5 billion acquisition of Noble Energy is a growth catalyst, as it will provide Chevron with low-cost proved reserves and promising undeveloped resources.
Buy This Dividend Aristocrat
Chevron is a high-quality business that has outlasted many recessions and periods of low oil prices over the past several decades. It has maintained an impressive track record of consistency, particularly when it comes to dividends. Chevron is a Dividend Aristocrat having increased its dividend for 33 consecutive years, with the most recent increase in January 2020. Chevron’s 6.1% dividend yield is very attractive for income investors, particularly with low interest rates and the average dividend yield of the S&P 500 Index currently below 2%.
In our estimation, Chevron stock could generate total returns above 12% per year over the next five years, consisting of future earnings-per-share growth as well as dividends. Such a high expected return and a long history of steady dividends and growth make Chevron stock a buy in our view.
Bob Ciura has worked at Sure Dividend since October 2016. He oversees all content for Sure Dividend and its partner sites. Bob received a Bachelor’s degree in Finance from DePaul University, and an MBA with a concentration in Investments from the University of Notre Dame.
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