Can Investors Trust the Chevron Dividend?

Oil and gas prices continue to fall, which is bringing down energy stocks across the board. One key member of Big Oil, Chevron (NYSE: CVX), has seen profits fall significantly over the past year.
As Chevron’s stock price has tumbled from a peak of $135 this year to its current level of $75, the Chevron dividend yield has spiked to 5.5%. This is truly rare territory for Chevron stock; the dividend has not been this high in the past decade.

Chevron Tries to Keep Its Head Above Water

Chevron management is trying to do everything possible to maintain its dividend.
Falling oil and gas prices caused Chevron’s profits to fall 90% last quarter to $571 million, year over year. To be fair, Chevron took a number of one-time, non-cash charges against earnings that are not expected to recur. For example, Chevron booked $2.6 billion of charges due to one-time impairments related to project suspensions and a downward revision in the company’s long-term oil price outlook.
Excluding this, Chevron’s results look much better. Cash flow from operations decreased 41% last quarter, which is still concerning, but not quite as alarming as a 90% drop in profit.
Chevron is also boosted by its large downstream unit. As an integrated major, Chevron’s downstream refining business provides a valuable offset when oil prices decline. During times of falling oil prices, refining feedstock costs decline as well. This boosts profit margins on the downstream side of the business.
Chevron’s downstream earnings more than tripled over the first half of the year, to $4.3 billion.
Nevertheless, in response to the deterioration in overall earnings, Chevron is aggressively cutting costs and raising as much cash as possible, because management knows how seriously investors feel about the Chevron dividend. Chevron’s dividend is a big reason why many investors hold the stock in the first place.
If Chevron were to cut the dividend, many investors would sell, as is common when dividends are cut. That would likely result in a large drop in stock price, adding to what has already been a very painful year for Chevron shareholders.
Over the first half of 2015, Chevron cut capital expenditures by 13% compared to the same period last year. That has saved the company $2.3 billion.
Plus, Chevron has curtailed its share repurchases this year, which will save additional cash. The company had been buying back its own stock at a rate of about $5 billion per year.
Lastly, Chevron is aggressively selling off assets that it deems non-critical to future growth. It sold $3.9 billion of assets just last quarter, and has realized nearly $11 billion in asset sales over the past 18 months.

Chevron Dividend Is a Risky Bet

Chevron management expects its cost-cutting and asset sales measures to result in the dividend being covered entirely with free cash flow by 2017, which would be huge for dividend sustainability. Ultimately, there are no guarantees in the stock market. Chevron’s earnings are closely tied to the prices of commodities. If oil and gas continue to collapse, even a strong, well-run company like Chevron will have to do what is necessary to stay afloat.
However, all indications from the company are that the dividend will remain intact. The company is aggressively selling assets and cutting costs to try to maintain its dividend. If commodities can stop crashing, Chevron’s dividend might just make it.

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