Chevron (NYSE:CVX) ranks among Warren Buffett’s favorite stocks and is Berkshire Hathaway’s fifth-largest position with total exposure of $18.6 billion.
While Buffett has recently slashed some of Berkshire’s holdings, including his stake in Apple, he has only trimmed Chevron by single-digit percentages this year.
Is this Buffett favorite a buy, and can investors expect to see strong returns from Chevron going forward?
Key Points
- Chevron offers a 4.3% dividend yield with a 37-year growth streak, drawing strong institutional support.
- Chevron’s cost-reduction plans and new Permian Basin projects aim to offset recent revenue declines.
- The company is fairly valued with limited downside.
50 Billion Reasons To Buy Chevron
In Q3, Chevron reported total revenues of $50.7 billion, down from $54.1 billion in the year-ago quarter while quarterly net income also fell to $4.5 billion from $6.6 billion.
The decline in earnings is expected to be counterbalanced in the coming two years by the company’s plan to reduce annual costs by $2-3 billion by the end of 2026.
While Q3’s performance was muted compared to prior year’s quarter, Chevron has bee increasing capacity, not least in the Permian Basin where new projects are expected to increase total supply to 300,000 barrels per day by 2026.
Meanwhile, Chevron is divesting older assets in various other fields, an effort that is expected to put about $10-15 billion in the firm’s pockets by 2028.
Chevron’s Renewable Energy Group is another growth vector thanks to a focus on liquid fuels, specifically biodiesel, that can provide energy with a lower carbon footprint than traditional gas and oil.
In 2023, a full 408 million gallons of liquid fuels were produced, a number that is only likely to grow as biodiesel demand gradually increases.
Looking forward analysts expect to see Chevron deliver modest earnings per share growth rate of 6.1% over the coming 3-5 years.
EPS growth will likely also receive a tailwind in the form of ongoing share buybacks. In Q3 alone, the company bought back about $4.7 billion worth of its own shares. Chevron has been buying back shares steadily since early 2023, when management authorized $75 billion for share repurchases.
Is Chevron Stock on Sale?
Many of Chevron’s valuation metrics suggest that the company is priced quite fairly. The stock trades at 1.4x sales, 14.5x projected earnings and 6.9x cash flow.
Looking at it through the lens of valuation, Chevron’s price-to-earnings-growth ratio is quite high at 3.4, but a high ratio of this sort isn’t unusual for a mature company that’s past its high-growth phase.
On the whole, Chevron appears to be reasonably valued but it’s unlikely to be undervalued by much, if at all.
This view appears to track with analyst price forecasts, which largely suggest returns in line with the broader market over the next year.
The median price target for CVX is $170.50, an 11.1% increase from the last closing price of $153.41. Wall Street seems to see very little downside potential in Chevron. The lowest standing price target for the stock is $145 per share, representing a downside of just 5.5%.
Institutional ownership of Chevron provides further evidence of Wall Street’s bullishness on the company. Over 70% of the company’s outstanding shares are owned by big money investors.
In the last 12 months, these institutions have bought nearly double the amount of CVX that they sold in terms of dollar value, suggesting that large buyers are still seeing ample value in owning Chevron.
Taking Chevron’s Dividend Into Account
A major factor to consider an oil titan like Chevron is the amount of dividend income it can produce which now amounts to $6.52 per share and yields 4.3%. This dividend has increased for each of the last 37 years, giving Chevron a strong track record of dividend growth that appears unlikely to end anytime soon.
The company’s dividend payout ratio of 71.7%, however, may make future growth somewhat slow. Consensus estimates suggest that the company’s dividend will continue to grow at about 3.5% annually over the next 3 fiscal years, compared to a trailing 3-year rate of 6.8%.
Is Chevron Going to Go Up?
The consensus among 23 analysts is for Chevron to go up to $170.09, suggesting upside of 4.6%.
At first glance, Chevron’s recent performance may not appear to have the makings of a strong buy. Revenues and earnings were both down over the past year but oil stocks are deeply cyclical and frequently go through periods of temporary contraction.
Chevron is no exception and so lower revenues and net income over the last year aren’t necessarily as concerning as they might be in a different industry.
A look at longer-term trends suggests that Chevron is likely still in a good spot, especially as lucrative new projects remain in focus.
Revenues are at their highest levels since the mid-2010s and far above their 2020-21 era averages. Net income has followed a similar trend and analysts still expect to see at least some earnings growth out of the company in the coming years.
The odds are oil prices will stay lofty as ongoing conflicts in the Middle East and Ukraine affect global supplies and raise risks for the market.
Taking all of this into account, CVX looks attractive as a long-term hold in both share price and dividends. Even if it only tracks with average market returns over the coming year as analysts expect, the high dividend yield is likely to support its returns to very attractive levels.
Furthermore, Chevron appears to have limited downside risk. For investors seeking long-term growth and income without exposing themselves to too much risk, Chevron looks to be a reasonably strong buy. The company is a good option versus mega-cap tech stocks because its valuation appears significantly more reasonable than that of the broader market.