Stock of the Week
NYSE Symbol: CVX
Industry: Oil & Gas
Price as of 10/2: $71.19
September is historically the worst month of the year and this year was no different. It was the first down month since March with the Dow Jones falling 2.3%, the S&P 500 finishing down 3.9% and the Nasdaq Composite declining 5.2%. The good news is October is the start of the best six months of the year with a possible new stimulus package coming out of Congress soon. The question going forward is do we continue to invest in what's been working even though valuations in many cases are at nose bleed levels or rotate into beaten down stocks that look like good value. This week we will highlight the Dow component, Chevron in the energy space. Things have been gone from bad to worse in the energy space over the last several years. Year to date, energy is down 50% with plenty of layoffs, dividend cuts and bankruptcies in the sector. However, the strong will survive and Chevron with arguably the best balance sheet among the majors should withstand the downturn and come out stronger on the other side as demonstrated with their recent $5 billion acquisition of Noble Energy. In the meantime, shareholders can enjoy the 7.3% dividend yield which looks safe for now.
In July, Chevron reported dismissal earnings with a loss of $1.59 a share as sales fell 64.1% year over year to $13.95 billion down from estimates of $21.71 billion. Right now, most energy companies are in survival mode cutting production and cutting costs to maintain cash and cash flow. Big names like Apache and Occidental Petroleum have slashed their dividends while Marathon Oil suspended their dividend. The International majors like BP cut their dividend in half while Royal Dutch Shell slashed its payout by about two-thirds. The good news for Chevron is they don't have to cut their dividend and can still tap the debt market if needed.
A number of analysts have recently come to the defend Chevron. The Morgan Stanley analyst wrote a recent report saying Chevron's dividend in the current $40 oil world is covered on a forward-looking basis. The analyst went on to say Chevron has one of the best balance sheets and low leverage which gives them additional flexibility through this period of uncertainty as demonstrated by the acquisition of Noble Energy. The merger with Noble will further diversify Chevron's portfolio to include a massive natural gas presence in the Eastern Mediterranean, while beefing up its shale footprint back in the U.S. The Bank of America analyst said recently the risk-reward has become attractive for Chevron. This analyst has a price target of $96 a share or 35% above current levels.
The most bullish analyst at MKM Partners has a price target of $121 a share or 70% above current levels. This analyst is predicting breakeven free cash flow this year for Chevron, but going forward, expects free cash flow to jump to over $10.5 billion next year and to $15 to $18 billion in the coming years as demand improves with global economies resume more normal activity.
In the short term, investors may continue to invest in the stocks that have been working, but anyone with a more long-term perspective, should be rewarded in Chevron's stock while also collecting a 7.3% dividend yield while they wait for this pandemic to subside.