There are a lot of expressions in personal finance. One of my favorites is that cash is king. As a dividend growth investor, I would take it a step further: Cash flow is king. It’s the reliably growing cash flows that I receive from my investment holdings via dividends that have allowed me to even embrace and take advantage of market volatility. When the stocks of great businesses stagnate or sell off, consistent passive income can help me seize the opportunity amid such market volatility. Supermajor Chevron (CVX) is a qualitative dividend grower that comes to mind.
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In each of the last 37 years, the S&P 500 Index (SPX) component has upped its payout to shareholders, making it a Dividend Aristocrat. I’m initiating coverage on CVX with a Buy rating. Let’s dig into the reasons for my bullish sentiment.
Chevron’s Revenue and Earnings Fell in Q3
While Chevron’s revenue and earnings declined in its third-quarter financial results reported on November 1st, I believe the company executed well despite challenging circumstances and exceeded the Street’s expectations. The supermajor’s revenue decreased 6.3% over the year-ago period to $50.7 billion in Q3 2024. A 7% uptick in daily oil and gas production to almost 3.4 million barrels was offset by a moderate drop in the average price of Brent crude to $80 a barrel.
Further, Chevron’s adjusted diluted EPS dipped 17.7% year-over-year to $2.51 during the quarter. Reduced refining margins contributed to the lower profitability in the quarter. However, the company did manage to beat analysts’ EPS consensus of $2.42.
Increasing Production and the Cost Savings Program Are Catalysts
Looking beyond Chevron’s Q3 results, production ramp-ups and structural cost reductions are two more reasons for my positive sentiment toward the stock. On the production front, the company began water injection operations at its Jack/St. Malo and Tahiti operations in the Gulf of Mexico in September. The improved recovery from these projects is expected to deliver an additional 300,000 barrels per day by 2026. That itself would be a respectable increase in Chevron’s company-wide production. The company also expanded its carbon dioxide storage portfolio, adding more than two million acres in Western Australia.
Moving to the efficiency side of the equation, Chevron is taking steps to deliver substantial cost savings to shareholders. The company is standardizing its approach toward maintenance events, which is expected to keep facilities online for more days and further lower unit costs. These efforts combined with the use of technology to enhance productivity are projected to generate between $2 billion and $3 billion in cost reductions by the end of 2026.
These are a couple of factors contributing to analysts’ consensus EPS of $11.29 for 2025, reflecting 8.7% growth. Another 14.1% rise in adjusted diluted EPS to $12.88 is expected for 2026.
CVX’s Dividend Remains Sustainable
Chevron’s appeal is further enhanced by the outsized income that it provides to shareholders. The stock’s 4.2% dividend yield is more than triple the S&P 500 Index’s 1.2% yield. Even in an environment with lower commodity prices and high capex, Chevron is expected to post $9.84 in free cash flow per share for 2024. Against the $6.52 in dividends per share to be paid this year, that’s a payout ratio of around two-thirds. This gives me confidence that Chevron can build on its dividend growth streak in the years ahead with at least mid-single-digit annual payout hikes.
Chevron’s Balance Sheet Is Remarkably Robust
Another trait that I like about Chevron is its financial strength. As of September 30, 2024, the company’s net debt ratio was just 11.9%. This suggests that Chevron’s balance sheet is well-capitalized. Additionally, the company’s interest coverage ratio through the first nine months of 2024 was 55.3. That means Chevron could sustain a sharp drop in profitability without it posing a crisis to solvency. As a result, the company enjoys an AA- credit rating from S&P Global (SPGI) on a stable outlook.
The Current Valuation Is Interesting
Chevron’s valuation also looks to be sensible here for a blue chip, which reinforces my Buy rating. The stock’s forward P/E ratio of 13.3x comes in just below its five-year average of 13.4x. As Chevron executes its production ramp-ups and cost-cutting measures, that could drive solid earnings growth for the foreseeable future. This leads me to believe that the five-year average P/E ratio remains a rational fair value estimate.
Is CVX a Buy, According to Analysts?
Turning our attention to Wall Street, analysts have a Moderate Buy consensus rating on Chevron. Out of 15 analysts, 11 have assigned a Buy rating in the last three months, while the remaining four have issued a Hold rating. At $171.31, the average 12-month price target indicates 9.27% upside potential.
Conclusion
Chevron is a high-quality income stock. It’s arguably executing admirably to achieve productivity and efficiency boosts. The stock’s pairing of immediate income and future income growth is also appealing. Additionally, Chevron is a financial fortress. Finally, the stock’s valuation seals the deal for my bullish case.
