This Energy Name Is One Dividend Aristocrat That Won't Burn You

The oil and gas industry is notoriously cyclical. Often referred to as a boom-or-bust industry, oil and gas stocks can skyrocket when commodity prices are rising, only to crash again in a downturn. So, risk-averse investors will find it hard to secure steady dividend stocks in the industry -- especially considering that over 2014 to 2016, many oil and gas stocks cut their dividends. Chevron Corporation , however, appears one of the few exceptions here. A time-tested energy giant, Chevron has increased its dividend every year for over 30 years, placing it on the exclusive Dividend Aristocrats list. With a positive future growth outlook, a 4% dividend yield, and a long history of consistent dividend increases, Chevron is a buy for income investors. Slick Strategy, Despite Earnings Slip Chevron is the third-largest oil major in the world based on its market cap of $231 billion, behind only Shell and Exxon Mobil . In 2018, Chevron generated 78% of its earnings from its upstream segment. Unlike many of its integrated peers, Chevron is more leveraged to the oil price, with a 61/39 production ratio. Moreover, as the company prices a significant portion of its natural gas volumes based on the oil price, about 75% of its total output is priced based on the oil price. As a result, Chevron is more leveraged to the price of oil than all the other oil majors. In early November, Chevron reported financial results for the third quarter of fiscal 2019. The company grew its production 3% over last year's quarter, thanks to 55% growth in the Permian Basin. But the average realized price of oil and gas slumped over last year's quarter. In addition, Chevron incurred a tax charge of $430 million due to repatriation of cash. As a result, its earnings plunged from $4 billion in last year's quarter to $2.6 billion, and its earnings-per-share of $1.36 missed analysts' consensus by 18 cents. Due to suppressed prices of oil and gas, analysts have lowered earnings-per-share forecasts for this year, which has kept a lid on Chevron's share price over the past 12 months. But we continue to believe Chevron is an attractive buy, as it possesses multiple compelling growth catalysts, even if oil and gas prices remain flat for several years. Future Growth Catalysts Chevron invested heavily in growth projects for years, but failed to grow its output for an entire decade, as oil projects take several years to start bearing fruit. However, Chevron is now in the positive phase of its investing cycle, as it is increasing its output, thanks to past investments while it has now reduced its capital expenses. Chevron increased its output by 5% in 2017 and 7% in 2018 and expects to boost its output by 4%-7% this year and by 3%-4% per year until 2024. Chevron's future earnings growth will be fueled not just by rising oil prices, but also by a massive ramp-up in production. Chevron grew its production by 5% in 2017 and 7% in 2018 and is on track to grow its output by 4%-7% this year. Moreover, it has provided guidance for 3%-4% annual production growth over the next five years. This is the benefit of having multiple growth projects coming on-line, in some of the highest-quality fields in the U.S. and around the world. First, the Permian Basin is one of the most productive and highest-quality oil fields in the United States. We believe that the sustained growth in the Permian Basin and in Australia will help the oil major meet its production guidance. It is remarkable that Chevron has more than doubled the value of its assets in Permian in the last two years, thanks to new discoveries and technological advances. Chevron has nearly doubled the amount of its estimated reserves in the area in just the past two years. Chevron anticipates further growth in store -- the company expects its production in the Permian Basin to reach 600,000 barrels per day by the end of 2020 and 900,000 barrels per day by the end of 2023. Another major area of growth is Chevron's Gorgon gas field in Australia. With total daily production averaging 2.6 billion cubic feet of natural gas and 18,000 barrels of condensate in 2018, Gorgon is one of the world's largest gas fields. It is especially attractive given its close proximity to high-growth emerging markets in Asia, where demand for energy is growing at a much faster rate than more developed economies. This Oil Dividend Aristocrat Is A Buy Chevron has above-average dividend safety, considering its industry. As a commodity producer, Chevron is vulnerable to any downturn in the price of oil, particularly given that it is the most leveraged oil major to the oil price. Fortunately, the company is in the positive phase of its cycle now. Chevron also had an unsustainable payout ratio from 2015 through 2017, but its payout ratio has fallen to a more reasonable level of 72%. Chevron's main competitive advantage is its size and industry position. As major projects have recently been completed, the company has achieved record free cash flows in the last two years. Chevron should continue raising its dividend for the foreseeable future. Analyst consensus calls for Chevron to report EPS of $6.25 for 2019. With an annual dividend payout of $4.76 per share, this translates to a 2019 payout ratio of approximately 76%. Chevron's dividend payout ratio is on the high side, but the dividend remains sufficiently covered. And, analysts expect Chevron's EPS to increase to $6.37 in 2020 and $6.96 in 2021, which provides even stronger coverage and will allow the company to keep raising the dividend modestly each year.

This Energy Name Is One Dividend Aristocrat That Won't Burn You

Chevron is a safe name in the oil and gas industry -- and offers a 4% yield.

Columnist Conversation

This Weekend on Real Money

Stocks Under $10 Portfolio

Why Is Walmart Down Big Today?

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.