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Chevron: Yield security has been dramatically improved – Chevron Corporation (NYSE: CVX)



Introduction

Over the past decade, shares in Chevron (CVX) will normally trade at a relatively higher dividend yield than Exxon Mobil (XOM). In recent times, however, this has turned. While this may be driven by various factors, the relative sustainability of dividend payments is a very likely underlying cause. When I recently published an article describing Exxon Mobil's weakened yield sustainability, it feels appropriate to provide similar coverage of its main rival in the investment world, Chevron, see my previous article on Exxon Mobil's exact data.

Dividend Coverage

When considering dividend coverage, I prefer to refrain from using earnings per share and using free cash flow instead, since dividends are paid from cash and not from "earnings". The graph below summarizes the company's cash flows over the past four years:

  Chevron cash flows   Chevron notes 1

(Image Source: Author)

Unlikely Exxon Mobil, which has seen dividend coverage over the first nine The months of 2019 fall below that through 2016, Chevron has seen its dividend coverage increase from negative 68.25% to a very strong 174.34% during this time period. This obviously places the company in a less vulnerable position than Exxon Mobil in the short to medium term.

Although the effects of change in working capital are excluded, dividend coverage will still be strong and show clear improvement, which is in fact the opposite of Exxon Mobil. During the first nine months of 2019, Chevron had $ 1.126 billion in working capital, while in 2016 it had $ 327 million in construction capital. If these are neutralized, the company's dividend coverage for 2016 will improve marginally to negative 64.18%, while in the first nine months of 2019 it would deteriorate slightly to a still strong 157.61%.

While the future direction of oil and gas prices will lead to Chevron's future dividend coverage, the current very strong coverage is reassuring, especially since oil and gas prices have still been quite soft for the first nine months of 2019. Given this situation, the reason is that the company's dividend yield is now lower than that of Exxon Mobil becoming clearer, as the risk of a future reduction is even less significant.

Financial Position

Although Chevron's dividend coverage is very strong, it is still important to assess its financial position, as it will continue to help ensure that the company's current dividend payments can be maintained. The two graphs included below summarize its financial position from the past three years:

 Chevron cash and debt   Chevron leverage ratio   Chevron notes 2

(Image Source: Author) [19659017] After going through these calculations, fortunately, it becomes clear that Chevron's overall financial position is very strong and has improved over the past two years. Based on these calculations, the company's financial position is surprisingly slightly stronger than Exxon Mobil's, which further explains the reason why the dividend yield has now switched to trading at a premium.

Given the strength of Chevron's financial position, the company would be able to finance a portion of its proceeds through debt for quite a number of years if necessary due to an oil and gas price accident. It will require debt to increase by about 200% before its financial calculations begin to be stretched enough that a dividend reduction could be seriously considered. This corresponds to approximately seven years of the company's current annual dividend payments. The length of time it can finance dividend payments through debt will, of course, also depend on capital expenditure. However, in Chevron's current situation, it seems significantly less vulnerable than Exxon Mobil.

Conclusion

While the situation has worsened for Exxon Mobil with its large investment program that leaves it more vulnerable than during the 2015-2016 oil price crash, the opposite has happened for Chevron. Although the company's current financial position is very strong, and thus the expansion of dividend payments is also very safe, the total return that the shareholders will receive in the future will be strongly determined by oil and gas prices.

Notes: Unless otherwise specified, all figures in this article were taken from Chevron's 2018 10-K and Q3 2019 10-Q SEC filings, all calculated figures were performed by author.

Disclosure: I / we have no positions in the above shares and have no plans to start any positions over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I do not receive compensation for it (other than Seeking Alpha). I have no business relationship with any company mentioned in this article.


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