Is Chevron A Top Dividend Aristocrat Stock Going Forward? (NYSE:CVX)

Elevator Pitch

I continue to have a Buy rating assigned to Chevron Corporation’s (NYSE:CVX) shares.

In my earlier update for Chevron Corporation published on October 10, 2022, I upgraded CVX’s investment rating to a Buy on expectations that the company will a beneficiary of the reduction in oil production. Chevron’s shares have outperformed the broader market by +240 basis points since my prior article was written. CVX achieved a total return of +15.08% in the past three and half months or so (source: Seeking Alpha price data) as compared to the S&P 500’s +12.68% rise in the same time period.

I turn my attention to Chevron Corporation’s attractiveness as a dividend play in the current write-up, and I think that CVX’s stock continues to warrant a Buy rating. Chevron Corporation’s free cash outlook is decent and the company’s management have the intention to continue with dividend increases. As such, I expect CVX to stay as a top dividend aristocrat stock going forward.

Recent Dividend Hike For CVX

Chevron Corporation issued a press release on January 25, 2023 announcing that it will pay out a quarterly dividend per share of $1.51 on March 10, 2023.

Prior to the recent announcement, CVX’s quarterly dividend payout was $1.42 per share. In other words, Chevron Corporation had made the decision to hike its quarterly dividend per share by +$0.09 or +6.3%. A year ago in late-January 2022, CVX also revealed that it will raise its quarterly dividend by +6.0% from $1.34 per share to $1.42 per share.

More significantly, the recent dividend hike implies that Chevron Corporation has raised its annual dividend payout for 36 years running, which is an amazing shareholder capital return track record.

Chevron’s Dividend Safety And Growth Expectations

The market sees CVX’s dividends growing in the next couple of years.

Specifically, the yearly dividend per share for Chevron Corporation is projected to increase by a three-year CAGR of +5.8% to $6.00, $6.29, $6.72 for fiscal 2023, FY 2024, and FY 2025, respectively as per S&P Capital IQ data.

The safety and growth potential of CVX’s dividends are dependent on the company’s willingness and ability. In my opinion, the sell-side analysts’ consensus dividend estimates for Chevron Corporation are realistic and achievable, in view of the company’s management intent (willingness) and cash flow generation (ability). These are the issues that I address in the subsequent two sections of the article.

CVX’s Stance On Shareholder Capital Return

At the company’s most recent Q4 2022 earnings briefing on January 27, 2023, Chevron Corporation outlined the company’s stance on capital return and dividend payments. There are three key things relating to CVX’s management comments at the recent quarterly results call that are worth paying special attention to.

Firstly, CVX referred to the company’s dividend payout and growth as “a long-term decision” at the fourth quarter investor call. Notably, Chevron Corporation also emphasized that it didn’t “cut the dividend since the great depression.” This sends a clear message that Chevron Corporation’s management has the intent of maintaining and growing dividends for the long run.

Secondly, the company noted that share repurchases are considered after “we satisfy our commitments on the dividend” and when it has “excess balance sheet capacity.”

Chevron Corporation stressed that the decision on future dividend growth is made independently from share buyback considerations. This implies that larger share repurchases do not translate into slower dividend growth or lower dividends. As an illustration, CVX increased its quarterly dividend payout by an impressive +6.3%, despite initiating a new $75 billion share buyback plan.

Thirdly, CVX highlighted at its Q4 results briefing that dividend growth is a reflection of the “ability to grow free cash flow at mid-cycle (energy) prices.” I will discuss about Chevron Corporation’s cash flow generation in the next section.

Free Cash Flow Outlook For Chevron

Free cash flow for CVX expanded by +78.2% from $21.1 billion for fiscal 2021 to $37.6 billion for FY 2022. Chevron Corporation paid out $11 billion in dividends for FY 2022, so that translates into a reasonably comfortable payout ratio of under 30% or 29.3% to be exact.

Looking forward, Wall Street forecasts that Chevron Corporation will generate free cash flow of $29.8 billion, $29.4 billion, and $24.0 billion for FY 2023, FY 2024, and FY 2025, respectively according to consensus numbers obtained from S&P Capital IQ. This means that CVX should continue to deliver annual free cash flow of above $20 billion, which is more than sufficient to meet its yearly dividend payments in the tens of billion dollars. As such, CVX shouldn’t have any issues growing its dividend payout by an annualized mid-single digit growth rate (consensus +5.8% three-year dividend CAGR as referred to earlier) for the next few years.

CVX had guided at its most recent quarterly earnings call that its capital expenditures will be “flat over the next several years”, and it also noted that “a breakeven Brent price around $50 per barrel” will “cover our capex (capital expenditures) and dividend.” This provides me with the confidence that Chevron Corporation is well-positioned to achieve free cash flow that can support dividend growth, as it can offset potential oil price weakness with an improvement in capital efficiency (i.e. flattish capex growth management guidance).

CVX Is A Top Dividend Aristocrat Pick

An August 25, 2022 Seeking Alpha article written by Kent Thune defines dividend aristocrats as listed companies which have “increased its dividends annually for at least 25 years” and are “part of the S&P 500.” Chevron Corporation meets the definition of a dividend aristocrat, and it is one of the 60-plus stocks in the list of S&P 500 Dividend Aristocrats.

CVX’s historical trailing twelve months’ dividend yield is 3.0%, while its consensus forward fiscal 2023 dividend yield is 3.2%. In contrast, the ProShares S&P 500 Dividend Aristocrats ETF (NOBL) offers a relatively lower trailing dividend yield of 1.9%. Also, a January 2023 research commentary published on NerdWallet (NRDS) highlighted that Chevron Corporation is among the top 20 companies on the S&P 500 Dividend Aristocrats list in terms of dividend yield.

In quantitative terms, CVX boasts a higher dividend yield than two-thirds of the stocks on the S&P 500 Dividend Aristocrats list. In qualitative terms, I view Chevron Corporation as a safe dividend stock with the ability and willingness to pay out higher dividends in the future. Therefore, I see Chevron Corporation as one of the better dividend stock investment candidates and a top dividend aristocrat pick.

Bottom Line

My Buy rating for Chevron Corporation remains unchanged. CVX is an ideal dividend pick in my view, considering various factors such as yield, growth, and safety.