Dividend Investor Portfolio #14: Pumping Profits
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Dear Investor,
Welcome to the 14th edition of TipRanks’ Dividend Investor Portfolio & Newsletter.
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Market-Moving News: June 24, 2024
Last week was short and turbulent, though stocks mostly ended higher than they began. At the beginning of the week, the S&P 500 (SPX), Nasdaq Composite (NDAQ), and Nasdaq-100 (NDX) posted new record highs as a surge in NVIDIA (NVDA) propelled a rally in tech stocks. The melt-up in the shares of the AI poster child even briefly propelled NVIDIA’s market capitalization above that of Microsoft (MSFT), making it the most valuable company in the world.
However, as investors returned to the markets following the Juneteenth holiday on Wednesday, the three major indexes stumbled in the last two sessions. Tech momentum reversed due to the heavy profit-taking and the corporate buyback blackouts ahead of the second-quarter earnings season. In addition, Friday marked the so-called “triple-witching” event, which usually boosts volatility significantly, with approximately $5.5 trillion of stock options, stock index futures, and stock index options expiring simultaneously.
Recent economic data has been a mixed bag, with strong PMI prints contrasting with cracks appearing in consumer financial health. This week, investors are looking ahead to the Federal Reserve’s preferred inflation gauge – the PCE report – along with consumer sentiment, inflation expectations, and other notable reports. These reports could shed some light on the state of the economy and its short-term outlook.
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This Week’s Quality Dividend Stock Idea
Chevron Corp. (CVX) engages in integrated energy and chemicals operations, operating in both the upstream and downstream segments. Chevron’s upstream operations consist of exploring, developing, producing, and transporting crude oil and natural gas, as well as gas liquefaction and regasification. Its downstream operations consist primarily of refining crude oil into petroleum products, producing other chemicals, and transporting oil and refined products.
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The Making of an Oil Giant
Chevron was founded in 1906 through the merger of Pacific Oil Company and Standard Oil Company of Iowa. It is the second-largest U.S. oil company, ranking #10 on the Fortune 500 list. CVX has a market capitalization of $282.6 billion and annual revenues of $197 billion.
Chevron has risen to its energy giant status thanks to internal growth and acquisitions, including Gulf Oil in 1984, Texaco in 2001, and Unocal in 2005. Additionally, in 2023, the company completed its $6.3 billion acquisition of PDC Energy. This acquisition will strengthen Chevron’s presence in the Denver-Julesburg Basin and the Permian Basin.
Moreover, the company’s proposed $53 billion acquisition of Hess Corp was approved by Hess shareholders in May. The Hess deal would result in CVX grabbing a 30% stake in the Guyana oil consortium, giving it a strong foothold in the area with massive oil discoveries, and providing CVX with significant additional production potential. Guyana is rich in offshore oil, with Hess Corp, ExxonMobil, and Chinese CNOOC – key players in Guyana – producing a combined 400,000 barrels per day from two existing offshore projects.
The potential development of 10 additional projects in Guyana gives Chevron access to one of the fastest-growing regions in the globe. However, the Hess deal still requires regulatory approval and faces an arbitration struggle against ExxonMobil, which claimed pre-emption rights. ExxonMobil has a 45% majority stake in the Guyana oil consortium. Due to the arbitration process, the deal might only be finalized in 2025.
Chevron conducts substantial business activities in over 180 countries around the world and continues to pursue expansion and diversification of its production sources. Thus, Chevron has a 50% interest in the Tengizchevroil (TCO) affiliate and an 18% non-operated working interest in the Karachaganak field in Kazakhstan. TCO is developing the Tengiz and Korolev crude oil fields in Western Kazakhstan. Interestingly, the company’s TCO base is expected to generate higher cash returns for its shareholders as capex declines over the years. This is because TCO’s Future Growth Project is expected to start oil production in the first half of next year.
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Robust Business Performance
Over the past five years, Chevron’s revenues have been growing at a CAGR of 5.3% while its adjusted earnings-per-share rose at a CAGR of 8.5%. In the fiscal first quarter, CVX reported better-than-expected revenues of $48.7 billion, far exceeding analyst expectations of $48.3 billion. However, the company’s Q1 adjusted EPS of $2.93 per share declined by 17.5% year-over-year due to lower margins on sales of refined products and lower realizations in its natural gas business.
In 2023, CVX produced 3.1 million barrels of oil equivalent per day, up by 4% year-over-year. More importantly, in the first quarter, the company’s production increased by 12% year-over-year to 3.3 million barrels of oil equivalent per day, which was driven by its PDC acquisition and strong operational performance in the Permian and Denver-Julesburg Basins. The rise in Chevron’s oil production should result in the company weathering any fluctuations in oil prices.
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Dividend Growth Supported by Strong Finances
Chevron is a financially healthy company with a very low net debt-to-equity ratio; in addition, it has been significantly reducing its liabilities over the past several years. Its capital efficiency metrics such as ROE, ROA, and ROIC, are way above the industry averages; so are CVX’s operating, FCF, and net profit margins.
At the end of the first quarter, CVX’s adjusted return on capital employed (ROCE) stood at 12.2%. The company is targeting a ROCE of more than 12% by 2027. For capital-intensive companies in the oil and gas industry like Chevron, this means that the company is targeting utilizing its capital more efficiently for additional profits.
Chevron has been consistently increasing its dividends over 36 years, which makes it a Dividend Aristocrat. The company has increased its dividend by 4.4% annually over 10 years, accelerating to a rate of 6.7% in the past five years.
In the first quarter, CVX paid a quarterly dividend of $1.63 per share. This represented an increase of 8% from the fourth quarter. The company’s dividend yield is 4.1%, which is above the sector average of 3.85%. Its dividend payout ratio is a moderate 50%, leaving sufficient room for dividend increases as well as capital available for M&A and reinvestment into the business.
The company’s free cash flow was $2.7 billion at the end of the first quarter. Free cash flows are the cash flows available for distribution to shareholders in the form of dividends, debt payments, or stock buybacks. Considering that Chevron expects an average annual growth of its FCF at more than 10%, it could translate to faster dividend growth ahead. Analysts project CVX’s dividend growth to average ~8.3% in the next couple of years.
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Total Return in Focus
CVX stock has underperformed the S&P 500 index over the past year, rising by ~3% while the S&P 500 has rallied by more than 25% over the same period. While this may be disappointing for short-term investors, CVX offers a growth trajectory with its long-term projects and reliable dividends.
However, the shorter term also looks optimistic, as leading Wall Street analysts forecast an average 12-month upside of over 20% for the stock, rating it a “Strong Buy”. Thus, in its recent update, Goldman Sachs underscored the company’s improving FCF generation and strong volume outlook, particularly in the Permian region. In addition, the bank said that the execution of the Kazakhstan project and the potential benefits from the Hess transaction suggest an optimistic future financial performance.
While the company’s current P/E is above the Energy sector’s average, it comes in the middle of the price scale for its peer oil & gas majors. In addition, in terms of future cash flows, CVX appears to be ~35% undervalued, which places the stock firmly within the “value stock” category. The well-known value investor Warren Buffett’s Berkshire Hathaway has increased its ownership of the company’s shares in the past several quarters, underscoring CVX’s potential. At the end of the first quarter, Berkshire owned a stake of over $23 billion in CVX, making it the third-largest shareholder.
The company also compensates its shareholders through large share repurchases. In 2023, Chevron spent $14.9 billion on stock buybacks, up by 32% from 2022. These were a part of the new buyback authorization of $75 billion, in effect since April 2023, which has replaced the completed previous authorization of $25 billion. During Q1 2024, CVX performed repurchases for the amount of almost $3 billion. While at the moment buybacks are restricted under SEC regulations due to the Hess merger arbitration, Chevron said it plans to resume buybacks at the $17.5 billion annual rate after the deal’s resolution.
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Investing Takeaway
We view Chevron as a robust and profitable oil giant with a focus on operational efficiency. The company’s stable rate of dividend growth is expected to continue in the years to come, which makes it an attractive addition to long-term income portfolios.
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Dividend Investor Portfolio
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Portfolio News
¤ Kroger (KR): the company reported its fiscal Q1 2024 results on June 20th, surpassing analysts’ revenue and EPS estimates. The company reiterated its FY24 guidance, with the annual EPS projection at $4.30-4.50 per share, compared to analysts’ expectations of $4.41 per share. Several Wall Street analysts upgraded their price targets on the stock. In other company news, Kroger said that it would pause share repurchases as it awaits for a regulatory approval of its $25 billion purchase of Albertsons.
¤ Qualcomm (QCOM): the stock has received an appraisal from the analysts at Tigress Financial Partners, who reiterated a Buy rating with a price target of $270. The Wall Street firm said the rating takes into account Qualcomm’s continued innovation and dominance in the communication sector, as well as its accelerating earnings potential based on the widespread adoption of its Snapdragon processors and its progressive development in AI technology.
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Recent Trades
None at the moment, although we are considering adding a stock to our portfolio when the market conditions allow for an attractive entry point. Stay tuned.
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Portfolio Attributes
| Dividend Portfolio Yield |
Dividend Growth Rate | Annual Dividend Income |
| 3.69% | 8.40% | $3,735.80 |
| Yield-on-Cost Adjusted |
Weighted Growth | Equal-Weight 100K Portfolio |
Current Portfolio
| Name | EX-Dividend Date | Payment Date | Dividend Yield | Annual DPS |
| Automatic Data Processing (ADP) | Jun 14, 2024 | Jul 01, 2024 | 2.18% | $5.60 |
| Allianz SE ADR (ALIZY) | May 08, 2025 | May 13, 2025 | 5.25% | $1.50 |
| Amgen (AMGN) | Aug 16, 2024 | Sep 06, 2024 | 3.23% | $9.00 |
| BlackRock (BLK) | Jun 07, 2024 | Jun 24, 2024 | 2.68% | $20.40 |
| Edison International (EIX) | Jul 01, 2024 | Jul 28, 2024 | 4.29% | $3.12 |
| JPMorgan Chase (JPM) | Jul 05, 2024 | Jul 31, 2024 | 2.20% | $4.60 |
| Kroger (KR) | Aug 16, 2024 | Sep 03, 2024 | 2.02% | $1.16 |
| LyondellBasell (LYB) | Aug 30, 2024 | Sep 05, 2024 | 5.07% | $5.36 |
| Philip Morris (PM) | Jun 21, 2024 | Jul 08, 2024 | 5.82% | $5.20 |
| Qualcomm (QCOM) | Aug 29, 2024 | Sep 20, 2024 | 2.03% | $3.40 |
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Click here for more stock market analysis from TipRanks Macro & Markets research analyst Yulia Vaiman
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Disclaimer
The information contained in this article represents the views and opinions of the writer only, and not the views or opinions of TipRanks or its affiliates and should be considered for informational purposes only. TipRanks makes no warranties about the completeness, accuracy, or reliability of such information. Nothing in this article should be taken as a recommendation or solicitation to purchase or sell securities. Nothing in the article constitutes legal, professional, investment, and/or financial advice and/or takes into account the specific needs and/or requirements of an individual, nor does any information in the article constitute a comprehensive or complete statement of the matters or subject discussed therein. TipRanks and its affiliates disclaim all liability or responsibility with respect to the content of the article, and any action taken upon the information in the article is at your own and sole risk. The link to this article does not constitute an endorsement or recommendation by TipRanks or its affiliates. Past performance is not indicative of future results, prices, or performance.
