Stock pick – Chevron


Kevin Simpson, founder and chief investment officer at Capital Wealth Planning, says Chevron is a good dividend payer and a good option in the current economic environment.

Chevron is a multinational energy company headquartered in San Ramon, California. It’s operations cover all aspects of oil and natural gas from exploration, production, refining, marketing, transport, and sales.

It operates in over 180 countries, and its main source of growth has come from oil extraction in previously unreachable areas by a process called “fracking”.

As of 2021, the company had 28,321 productive oil wells in the United States.

Simpson said Chevron is a good investment as it is a strong dividend payer in a high inflation environment.

He said he likes companies with strong earnings growth, especially when they pay out a significant portion of their earnings to shareholders.

Chevron currently has a 3.5% dividend yield and increased its dividend payment by 4% annually, on average, over the past five years.

“A company that is able to increase its dividends by 4% per year can truly hedge an investor against inflation,” he said.

In July, Chevron released its second-quarter results, revealing $11.6 billion in profits. The company’s earnings per share hit $5.82, beating the expected $5.03 EPS by 15.7%.

The chart below shows Chevron’s annual dividend payments (in green below) since 2010. Over this period, the company has not had a year in which its dividend payments have declined.

The dividend payout ratio (in purple below), also shown below, revealed that Chevron has experienced periods where the dividend per share has increased above the earnings per share.

It shows that the company is committed to maintaining its dividend increases, whatever it takes.

A dividend payout ratio of over 1 is unsustainable, but this should not be of great concern as Chevron’s average payout ratio over the last few years was 0.71.

Over the last decade, Chevron achieved an average dividend yield of 4.32% and proved that it could maintain a strong growing dividend at sustainable levels.

Tracking the oil price

An important consideration when buying Chevron is how it tracks oil prices, as seen in the graph below.

Since 2018, Chevron’s share price returns have had a 0.86 correlation coefficient with the oil price – a very strong positive linear correlation.

It means that Chevron’s share price is likely to follow when the oil price falls.

However, many investors may not be worried about the price return of Chevron and are happy with the returns they receive from dividends alone.

Oil price (orange) and Chevron share price (blue)


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