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Will Oil Major Chevron (CVX) Soon Raise Its Dividend?


Will Chevron Corporation CVX raise its dividend soon?

The question is back on the table with U.S. West Texas Intermediate (WTI) recently climbing to a two-and-half year high settlement of $58.95 a barrel. Struggling for much of the past three years, the energy industry looks to have finally turned a corner, courtesy of tightening supplies, rising demand and OPEC-deal extension talks.

With oil slowly on the mend, shares in energy companies have recovered from their steep slump. At around $58 now, the contract has more than doubled from the dark days of February 2016 when the commodity fell to a 12-year low of just over $26 per barrel. Naturally, this has resulted in a major improvement in Chevron’s fundamentals, and subsequently its share price. In fact, Chevron is up 14.1% in the past six months – a significant rise considering its status as a ‘traditionally defensive play’.

Yes, conditions have improved but have they improved enough to warrant a dividend increase from the second-largest U.S. oil company by market value after ExxonMobil Corporation XOM? Because while oil has been on fire, the commodity's success is yet to translate into big gains for Chevron’s dividend investors.

Chevron last raised its payout by 1% in October 2016, essentially meaning four quarters of flat dividend. However, the company stills pays its investors an attractive 3.7% yield.

Business Overview

San Ramon, CA-based Chevron is one of the largest publicly traded oil and gas companies in the world, based on proved reserves. It is engaged in oil and gas exploration and production, refining and marketing of petroleum products, manufacturing of chemicals, and other energy-related businesses.

A Dividend Aristocrat

The diversified oil company has a long and consistent dividend paying record. It is one of the only two energy stocks on the list of Dividend Aristocrats – a group of 51 companies in the S&P 500 Index that have raised their payouts for more than 25 years in a row. Chevron has increased its dividend for 29 consecutive years compared to 34 for ExxonMobil, the other energy Dividend Aristocrat.

How Safe is Chevron’s Dividend?

Like all energy companies (big or small), Chevron is also susceptible to the oil market ups and downs. During the commodity price collapse, the company’s cash from operations fell far short of its capital spending. Therefore, when ExxonMobil remained free cash flow-positive throughout the downturn, Chevron – one of the most oil-weighted majors – relied on asset sales and debt to plug the deficit.

Yet, the company continued to reward shareholders with a large annual dividend of $4.28 per share – yielding around 4%. Not only that, Chevron even upped its dividend in 2016 when the pricing environment was far more challenging.

The good news is, things have changed for the better in 2017. A stable floor under oil price, together with asset sales and lower operating expenses helped boost profits. Therefore, Chevron's dividend appears to be relatively safe, thanks to improvement in its cash generating potential.

Strong Cash Flow from Operations

During the last nine months, the oil major reported a sharp year-over-year increase in cash flow from operating activities, which is a key metric to gauge the financial health of the firm. The company generated enough cash to pay off debt along with funding capex and dividend payments.

With commodity prices on their way up, Chevron reported net earnings of around $6.1 billion in the first nine months of 2017, turning around from the year-ago corresponding period’s net loss of $912 million. Importantly, the supermajor reported $14.3 billion in cash flow from operations, up from $9 billion in the year-ago period.

In the third quarter, Chevron generated $5.4 billion in operating cash flow, while shelling out around $5.2 billion in capital expenditures and dividends. This led to around $200 million in excess cash flows – something the company achieved for the first time since 2012. Going forward, we expect Chevron's free cash flow to improve significantly amid the company's initiatives in cost reduction, exiting unprofitable markets and streamlining the organization.

Business Model Adapting to $50 Crude

The robust cash flows underscore the fact that Chevron can not only survive but also flourish at $50 a barrel. The remodeling of portfolio and strategies have made the firm way more resilient to reduced crude prices, thus achieving break-even at $50 a barrel or even lower.

Break-even price is one of the popular metrics to determine the success of oil companies. It indicates the oil price which a company requires to generate enough cash to meet its dividend and capex requirements.

An Imminent Payout Hike Still Looks Unlikely

Despite profit rising from a year earlier and Chevron transforming itself from a cash guzzler to a cash generator, we do not expect the company to raise its quarterly dividend at least through the first half of 2018.

The commodity price environment, while improving all the time, still remains challenging and Chevron might ideally want to strengthen its modest free cash flow surplus before rushing into a dividend hike. And while investors would like the company to make it 30 successive years of dividend increase, we believe Chevron would not want to undo its great work over the past couple of years. In fact, a flat but stable payout amid higher cash generation will ensure that more money can be put back into the company, making it stronger, financially healthier, and possibly a better income investment for the future.

Zacks Rank & Stock Picks

Chevron currently carries a Zacks Rank #3 (Hold), implying that it is expected to perform in line with the broader U.S. equity market over the next one to three months.

Meanwhile, one can look at better-ranked energy players like ConocoPhillips COP and BP plc BP. Both are Zacks Rank #1 (Strong Buy) stocks. You can see the complete list of today’s Zacks #1 Rank stocks here.

Houston, TX-based ConocoPhillips is a major global exploration and production (E&P) company with operations and activities in 21 countries that include the U.S., Canada, the U.K./Norway, China, Australia, offshore Timor-Leste, Indonesia, Libya, Nigeria, Algeria, Russia and Qatar. The 2017 Zacks Consensus Estimate for this company is 54 cents, representing some 120.4% earnings per share growth over 2017. Next year’s average forecast is $1.68, pointing to another 209.9% growth.

London-based BP is one of the world's major energy companies that provides its customers with fuel for transportation, energy for heat and light, retail services and petrochemical products. It surpassed estimates in three of the last four quarters at an average rate of 26.8%.

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