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Chevron Is an Elite Dividend Stock (and Has Plenty of Fuel to Continue Growing Its 4.3%-Yielding Payout)

Motley Fool - Tue Feb 6, 5:28AM CST

Chevron(NYSE: CVX) doesn't get enough credit for its ability to pay dividends. The oil giant has increased its payout annually for 37 straight years. That's the second-longest streak in the oil patch, and it's particularly impressive given the sector's volatility.

Beyond that, its dividend growth rate takes it up a level as an investment. The company has delivered above-average payout growth over the last five years (which is impressive considering its yield of 4.3%). And it should have plenty of capacity to keep increasing its payouts at a healthy pace.

Not your average dividend stock

Chevron recently closed the books on another record year. The oil company returned a record $26 billion to shareholders in 2023 -- $11.3 billion through dividends and $14.9 billion in stock buybacks (32% more than in 2022). The share repurchase program helped it keep its total cash outlays for dividends to 3% above 2022's total, even though it boosted its per-share payment by 6%.

That 6% dividend hike aligned with its five-year average.

"Our five-year dividend growth rate was greater than the S&P 500 and more than double our nearest peer," noted CEO Mike Wirth on the fourth-quarter earnings conference call. The company's ability to grow its dividend faster than the S&P 500 is impressive, given its much higher yield (4.3% versus 1.4% for the S&P 500).

Chevron has continued to deliver peer-leading dividend growth in 2024. The company recently increased its payment by 8%. That was twice as much as the 4% hikes provided by ExxonMobil and Shell this year.

The fuel to continue growing its dividend

Chevron is in an excellent position to continue increasing its payout at a healthy rate. The oil giant expects to grow its free cash flow at an average annualized rate of more than 10% through 2027, assuming oil averages about $60 per barrel. (That's more than $10 per barrel below its current level.) The main factor fueling that view is its high-return capital program.

That cash flow level would provide Chevron with the financial capacity to fund its capital program, increase its dividend, and repurchase shares at the low end of its $10 billion to $20 billion annual target range. Meanwhile, an oil price of around $70 a barrel would give it the fuel to repurchase shares at the high end of its range. At those rates, Chevron could buy back 3% to 6% of its shares each year at its current stock price. The company's repurchase program can almost set a floor of 3% annual dividend growth per share while maintaining its current total cash outlay.

In addition to the potential upside from higher oil prices, Chevron has another upside catalyst: Hess (NYSE: HES). Chevron agreed to buy its rival in a more than $60 billion deal that it hopes to close by the middle of this year. The acquisition of Hess would more than double Chevron's free cash flow by 2027 while extending its growth outlook into the 2030s. Further, while the company expects to issue lots of stock to fund the deal, it anticipates the acquisition will be accretive to its free cash flow per share starting next year, once Hess and its partners finish their fourth offshore development project in Guyana.

Between organic free cash flow growth, share repurchases, and the pending Hess acquisition, Chevron should have the fuel to continue increasing its dividend at a healthy rate (potentially 6% or more each year). Further supporting that view is its relatively low dividend payout ratio (30% of its cash flow from operations and 49% of its free cash flow in 2023 despite a 20% drop in oil prices and a steeper plunge in natural gas) and fortress-like balance sheet (7.3% net debt ratio at the end of 2023 compared to a 20% to 25% target range).

Energize your income

Chevron is a top-notch dividend stock. It offers a high-yielding payout that has grown at an above-average rate for the last several years. Given its cash flow growth expectations and conservative financial profile, that trend seems likely to continue. These features make Chevron a top stock for those seeking an attractive and growing income stream.

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Matthew DiLallo has positions in Chevron. The Motley Fool has positions in and recommends Chevron. The Motley Fool has a disclosure policy.

Paid Post: Content produced by Motley Fool. The Globe and Mail was not involved, and material was not reviewed prior to publication.

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