Last year, Berkshire Hathaway (BRK.B) - which is led by the legendary value investor Warren Buffett - earned a dividend of $5.5 billion. Although Berkshire itself does not pay a dividend, the conglomerate has invested in many dividend aristocrats, including long-time holdings like Coca-Cola (KO).
Berkshire Hathaway’s 13F filing for Q4 2023 revealed that it was a net seller of stocks (i.e., more stock sells than buys) during the quarter. In fact, the conglomerate has now been a net seller of stocks for five straight quarters. However, in Q4, the “Oracle of Omaha” added almost 16 million shares of Chevron (CVX). With over 126 million CVX shares under its belt, Berkshire is the second-largest shareholder of Chevron after Vanguard.
Warren Buffett Bought Chevron Shares in Q4
Notably, Buffett has been upbeat about energy shares. While he previously cut Berkshire's Chevron's stake between Q4 2022 and Q3 2023, he has been adding more Occidental Petroleum (OXY) shares. Berkshire has the regulatory approval to increase the stake to as much as 50%, and currently holds around a 28% stake.
Returning to Chevron, its most recent quarterly dividend was $1.63, which implies a forward dividend yield of nearly 4.2%. For context, the S&P 500 Index’s ($SPX) dividend yield is just about 1.3%.
Chevron Has Grown Its Dividend Steadily
During their Q4 2023 earnings call, Chevron management gave a broad overview of the dividend and capital allocation policy. Chevron’s CEO Mike Wirth said, “we were the most capital efficient while managing unit costs well below inflation and many peers.” He added, “Combining this discipline with our focused portfolio of advantage assets, Chevron was able to lead the peer group in returning cash to shareholders.” He stressed that Chevron’s five-year dividend growth was higher than the S&P 500, and more than double its nearest peer.
When evaluating a dividend aristocrat, investors should consider a few aspects. The first is, of course, the company’s dividend policy, which includes both its commitment as well as ability to pay dividends. Second, it is also worthwhile to check the company’s outlook, as a lot of dividend aristocrats have fared poorly in terms of price action. This means that despite a supposedly high dividend, the total investor returns have been lackluster - or even worse, negative.
Chevron’s Dividend Policy
During the COVID-19 pandemic in 2020, while multiple energy companies, including BP (BP), cut their dividends, Chevron did not lower shareholder payouts - even as it went on a cost-cutting spree elsewhere. Speaking with CNBC’s Squawk Box in March 2020, Wirth said, “Our dividend is our number one priority and it’s very secure.” For the record, the last time Chevron cut its dividend was during the Great Depression, and the company has now increased the dividend for 37 consecutive years, making it a worthy dividend aristocrat.
During the Q4 2023 earnings call, Chevron's CFO Pierre Breber said that the company’s 2023 capex and dividends would have been covered even with oil prices in the low $50s. A higher oil price puts more cash in the coffers, which Chevron has been using for share repurchases and dividend hikes. Last year, it repurchased $15 billion worth of its shares, extinguishing 5% of its outstanding shares in the process.
With crude futures (CLK24) in the low $80s, Chevron’s dividends look more than covered - and given management’s commitment to increasing dividends, shareholders can expect a payout bonanza in the near future, also.
Oil Price Outlook Looks Reasonably Bullish
The forecast for oil prices looks reasonably bullish, especially as The Organization of the Petroleum Exporting Countries (OPEC) has been maintaining supply discipline – unlike in the past, when member states prioritized market share over profits. The demand environment is also holding up quite well, despite ongoing concerns about the Chinese economy. A stable oil price outlook bodes well for energy companies like Chevron, as their earnings are closely intertwined with oil and gas prices.
Chevron Stock Price Forecast
With a YTD gain of just 5.7%, Chevron stock is underperforming the S&P 500 Index. Analysts, however, are bullish on the stock’s forecast, and Chevron has a consensus rating of “Moderate Buy” from the 18 analysts covering the stock. Its mean target price of $177.22 is 12.3% higher than last week's closing price.
I believe, given the positive outlook for energy prices, oil stocks look like a good bet. Chevron’s valuations also look reasonable; it trades at a next 12-month (NTM) enterprise value to earnings before interest, tax, depreciation, and amortization (EV-to-EBITDA) multiple of 5.71x, which is in line with its average multiples over the last three years. The company also has a healthy balance sheet with manageable leverage ratios, and its net debt ratio was 7.3% at the end of 2023.
Overall, I believe that CVX is one Warren Buffett dividend aristocrat that brings both a fat dividend yield and the prospects of capital appreciation to the table, and the oil major can be a good add for those craving quality dividend stocks.
On the date of publication, Mohit Oberoi had a position in: BRK.B . All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
