Is Chevron’s 5.6% Yield Safe?
Chevron Corporation’s (NYSE:CVX) stock price has taken quite a beating in financial markets, as the oil price collapse continues to hurt energy companies. Indeed, the Chevron dividend payment might now be in trouble, with some analysts suggesting the integrated oil giant may not be able to pay out its shareholders if oil prices remain low.
Chevron’s dividend yield is in the range of 5.52%, which sounds healthy until you realize that it’s mostly based on the CVX stock price plummeting by nearly 40% in the last year. (Source: Chevron, last accessed September 25, 2015.) The company’s management is essentially attempting to shore up investor confidence by demonstrating it has the financial stability to maintain consistently increasing dividend payments.
Is Chevron Stock in Trouble?
There’s no escaping the realities of the energy sector price crunch, and while long-term investors will likely stick with Chevron in hopes of the stock rising back up when oil prices eventually rebound, market uncertainty will make it difficult for the company to attract new ones.
The company surprised analysts when it beat dividend forecasts of $3.30 by releasing an annualized dividend payment of $4.28. (Source: Forbes, last accessed September 25, 2015.) Chevron has been explicit in that it wants to maintain that dividend yield, though its ability to do so is mostly contingent on the price trajectory of oil.
Chevron’s management has made it clear that it will do everything in its power to maintain that CVX stock dividend, and has been tightening its belt.
But it will be more than difficult, considering the company’s current financial state.
Consider the Following
Chevron’s profits fell to $571 million in the last quarter. Put another way, they fell by 90% year over year. (Source: CNBC, last accessed September 25, 2015.) This is a catastrophic shift no matter how you spin it. When the value of the primary product your business sells loses half its value in a year, cutting your profit margins to the bone, this is bad news.
How is the Company Surviving, Then?
What helped to offset the massive downturn in Chevron’s profit was its heavy downstream operation. Chevron’s downstream units benefited from low oil prices, which at least partly counteract the sharp drop in crude since summer 2014 by boosting refining profits.
Revenue streams from Chevron’s downstream segments in fact tripled in the first half of 2015 compared to the same period in 2014, from $1.431 billion to $4.379 billion. (Source: Chevron, last accessed September 25, 2015.)
But offsetting massive losses for an indefinite period of time is not a successful business model. So Chevron has had to get serious about cutting expenses. Capital expenditures and investments in upstream exploration and production have been slashed repeatedly, as the company’s upper management looks for more ways to stabilize Chevron’s stock price and improve its balance sheet. Chevron’s capital expenditures have in fact been cut by 13% year on year, saving the oil energy giant $2.3 billion.
How Do Investors Feel About Chevron Stock?
There is also the recognition that consistency in paying out dividends is highly important to Chevron’s shareholders, which means freeing up as much cash as possible in this regard.
Chevron has also throttled back its share repurchasing program in 2015, where it had been spending approximately $5.0 billion per year on buying back its own stocks.
A reduction in the Chevron dividend would be an immediate negative signal to investors, who would start selling off the stock and pushing the CVX stock down. When you consider just how bad of a year Chevron has had from a financial point of you, it becomes obvious why avoiding dividend cuts is so important.
Perhaps most importantly, the company has been aggressively selling its non-critical assets, to the tune of $3.9 billion in the last quarter alone. Chevron has in fact succeeded in selling off almost $11.0 billion worth of assets in the last year and a half.
What the company then expects is that these measures will soften the blows of the low oil price environment, allowing for the company to pay shareholder dividends using cash until at least 2017. This would be quite the achievement for the Chevron dividend, and go a long way towards inspiring confidence by reassuring investors that the company has a good grip on its finances.
But How Likely is this Strategy to Work?
If oil prices continue to slip further down, or even if they manage to stay at this level in the mid-$40.00 range, no amount of cost-cutting measures will be able to shield the Chevron dividend. If oil prices manage to stabilize, Chevron’s ability to pay its shareholders a premium dividend just might have a chance.