Over the past year, the price of Brent Crude, a key global oil benchmark, has been as low as $70.31 and as high as $93.12. Over the past three years, the swing from peak to trough was even greater, with the low at $69.53 and the high at a whopping $133.18. Talk about a roller-coaster ride! This is why the smartest oil stock for most investors right now will be reliable industry giant Chevron (NYSE: CVX).
Before getting into Chevron’s business, it is worth looking at one of the biggest benefits investors get from owning the stock: its dividend. The dividend yield is around 4% right now, which is notably above the energy industry average of 3.3% and the S&P 500‘s average of 1.2%. The dividend backing that high yield has been increased annually for 37 consecutive years. Note that this includes hikes when oil was trading at $133 and when it was trading at $69, or lower.
Are You Missing The Morning Scoop? Wake up with Breakfast news in your inbox every market day. Sign Up For Free »
Those dividend stats alone prove just how reliable a company Chevron is. And, in fact, that might be enough to get long-term dividend investors to buy this oil giant. But there’s more to like here than just the yield. That’s where the business comes in.
Chevron is what’s known as an integrated energy company, which means it has operations across the energy sector. That includes energy production (the upstream), energy transportation (the midstream), and chemicals and refining (the downstream). Each of these segments operates a little differently, and having all three in the portfolio helps to soften the peaks and valleys inherent to the commodity driven energy sector. It’s also worth noting that 75% of Chevron’s oil investments have a break-even point that is below $50 per barrel, which gives it a lot of operational leeway.
On top of that, Chevron has an investment-grade-rated balance sheet. That alone, however, doesn’t do justice to the importance of the company’s financial strength.
Chevron has been around a very long time and is well aware of the volatility of the sector in which it operates. That’s why it has created a diversified business, so it can better weather the inherent ups and downs it will face. But the real key to the company’s ability to continue rewarding investors with dividend increases — even when oil prices swing wildly — is its balance sheet.
When times are good, Chevron keeps its leverage low. Right now the company’s debt-to-equity ratio, a measure of leverage, is around 0.17 times. It is one of the lowest levels of leverage among the company’s closest integrated energy peers. The company is, basically, preparing for what it knows is coming: another oil downturn. Management doesn’t know exactly when, but it knows very well that the industry is volatile and lower oil prices are almost certain to arrive eventually.