Chevron (NYSE:CVX): How Safe Is The Dividend?
Chevron (CVX) looks enticing when taking a cursory look at the historical dividend statistics.
The stock currently yields around 4.3% and has provided highly reliable dividend growth over the years.
Chevron’s dividend has increased by 7.8% per year over the last 20 years and by 8.5% annually over the last five years.
The company is also a dividend aristocrat, having raised its dividend for over 28 straight years. Investors can learn more about dividend aristocrats and download their data here.
Despite Chevron’s appealing historical dividend growth, income investors have been burned over the past year with a number of high profile dividend cuts in the oil and gas industry.
While Chevron has been a favorite blue-chip dividend stock that has padded dividend investors’ portfolios for years, we think it is prudent to analyze the business to determine if Chevron could be the next one to cut their dividend in this historic oil and gas downturn.
Chevron is a global integrated oil and gas company.
Their upstream operations (~26% of 2015 revenue) consist of exploring for, developing, and producing crude oil and natural gas; processing, liquefaction, transportation and regasification associated with liquefied natural gas; and transporting the crude and natural gas.
The downstream operations (~73% of 2015 revenue) consist of refining crude oil into petroleum products; marketing of crude and refined products; transporting crude oil and refined products by pipeline, marine vessel, and rail car; and manufacturing and marketing of commodity petrochemicals, plastics, fuel additives, and lubricants.
As of the end of 2015, Chevron had significant net proved reserves in their upstream business. These net proved reserves totaled an estimated 6.26 billion barrels of oil and 29.4 billion cubic feet of natural gas.
Their reserves do have some geographic concentrations with 21% of the net proved reserved located in Kazakhstan and 19% located in the United States.
During 2015 Chevron continued to expand production with oil-equivalent production of 2.62 million barrels per day, which was up 2% year-over-year from 2014 levels.
For 2016 the company estimates that worldwide oil-equivalent production will be flat to up 4% compared to 2015.
The business has struggled since the dramatic collapse in oil prices. Revenue in the upstream segment was down 47% from 2013 to 2015, and the downstream business was down nearly 43% over the same time period.
Clearly the largest driver of revenue and profits for the business is the price of oil. We are not experts at forecasting the price, nor do we believe there are many people who can consistently, accurately forecast the price.
According to the Energy Information Agency’s Annual Energy Outlook 2016 report, which is probably as good as any, the price for West Texas Intermediate (WTI) is expected to increase 4% per year from 2015-2040 while Brent is expected to increase at 3.9% over the same timeframe.
It is anybody’s guess as to what the future holds for energy prices, but it is unlikely that energy prices will remain at depressed levels for decades into the future.
While the current environment is not good for Chevron and could get worse, it is unlikely to stay this bad for an extended period of time.
Let’s take a look at how much longer Chevron can potentially maintain its dividend in today’s environment.
Dividend Safety Analysis: Chevron
We analyze 25+ years of dividend data and 10+ years of fundamental data to understand the safety and growth prospects of a dividend. Chevron’s dividend and fundamental data charts can all be seen by clicking here.
Our Dividend Safety Score answers the question, “Is the current dividend payment safe?” We look at factors such as current and historical EPS and FCF payout ratios, debt levels, free cash flow generation, industry cyclicality, ROIC trends, and more.
Dividend Safety Scores range from 0 to 100, and conservative dividend investors should stick with firms that score at least 60. Since tracking the data, companies cutting their dividends had an average Dividend Safety Score below 20 at the time of their dividend reduction announcements.
Chevron’s Dividend Safety Score is 25, which indicates that the dividend is risky based solely on the company’s fundamentals. When Conoco Phillips cut its dividend earlier this year, it had a Safety Score of 17.
However, Chevron’s management team publicly remains very committed to the dividend. Here is Patricia Yarrington, the CFO, on the Q2 2016 earrings call:
“Our financial priorities remain unchanged. We’re committed to growing the dividend as earnings and cash flow permit. We recognize the value our shareholders place on dividends and the value they place on our long term annual dividend payment increases.”
Source: Seeking Alpha
She further elaborated on the importance of the dividend:
“…we’ve had the same financial priorities for a long time. Dividend return to shareholders being first, and then reinvestment in the business second, and then having a prudent financial structure being third. And I don’t see those priorities changing going forward.”
Source: Seeking Alpha
Chevron’s quarterly dividend has remained frozen at $1.07 per share for 10 quarters, highlighting the pressure the business is under.
Let’s investigate some of the key ratios and drivers of the Dividend Safety Score to determine if the dividend is at risk of a cut.
Currently, analysts expect Chevron to generate EPS of $1.29 for Fiscal Year 2016, and we expect the company to pay out about $4.28 per share in dividends this fiscal year (assuming no dividend increase or cut from 2015 levels).
This implies a payout ratio of about 232%. Clearly that is unsustainable. Even looking out to next year when analysts expect Chevron to earn $5.24 per share, a stable dividend would imply a payout ratio of 82%, which is well above the historical levels.
Source: Simply Safe Dividends
The company did not generate positive free cash flow in 2015 and is not generating positive free cash flow year-to-date in 2016 either.
So far this year, Chevron has used $14 billion of cash on capital expenditures ($10 billion) and dividends ($4 billion) while only generating $3.7 billion in cash from operations.
These payout ratios are not healthy for a cyclical oil and gas business and could indicate a dividend cut is on the horizon if the company cannot continue raising funds in other ways.
As of the end of Q2 2016, the Chevron had about $9 billion in cash and marketable securities on its balance sheet. This cash position was offset by $5.53 billion in short term debt and about $39.5 billion in long-term debt.
On an annualized basis, the company will spend about $8 billion dollars on dividend payments. Therefore, Chevron only has enough cash to fund about half a year’s worth of dividend payments.
In order for the company to maintain the dividend when it is not generating positive free cash flow and doesn’t have the cash balance, they need to drastically improve the cash position on the balance sheet. They are doing this through asset sales, capital expenditure cuts, SG&A and operating expense reductions, and borrowing money.
So far this year, Chevron has sold assets worth about $1.4 billion dollars and is targeting asset sales of $5-10 billion dollars for 2016-2017. While this could