Oil’s recent sell-off provided one of the best buying opportunities in the energy sector since the Lehman crash. Of course, the next logical question is, “what security?” I started by looking at the big, multi-national oil companies. What first attracted me to CVX was its dividend, which is currently yielding a healthy 4%. On deeper analysis, I believe the dividend is safe, making this a very attractive company, especially at current price levels.
Let’s start by looking at the weekly chart:
Charts, however, aren’t the whole picture. Let’s turn to CVX’s valuation by looking at this table from Morningstar:
Turning to the company’s financials, CVX’s balance sheet demonstrates the company is well managed. Accounts receivable has decreased from 11.24% of assets in 2010 to the current level of 6.29%. Inventory levels have been consistently between 2.5% and 3%. The current ratio is 1.32, giving the company a bit of financial flexibility. On the other side of the balance sheet, long term debt is only 9% of liabilities. Value investors should be impressed by the increase in book value, which rose from $105 billion in 2010 to $155 billion in 2014. Although not bullet proof, CVX’s balance sheet is in good shape.
This is fortunate, because the income statement shows some weakness. The company’s revenue fell from $254 billion in 2011 to the current level of $211 billion. Over the same period, the cost of revenue has decreased from 66.2% to 56.4% while operating expenses have increased by the same amount. The result is net margin has consistently been between 9%-10% for the last five years. Management has been distributing a large minority of these earnings. The dividend payout ratio has increased from 30% in 2011 to its current level of 41%. This is a key reason why the current dividend is safe. Top line revenue would have to fall by 40% before the payout ratio was challenged. With a company of this size, a drop of that magnitude is highly unlikely.
Finally we have the cash flow statement. Free cash flow (operating cash flow – investment expenses) has been positive in all but one year for the last five years. From 2010-2102, the company added $38 billion in cash before considering investment activity; the only year of decreases saw a drop of $607 million.
To conclude, the company is a bit undervalued. Its balance sheet is solid, with a well-managed short-term asset position and a reasonable amount of debt. Although revenue has declined, it would have to drop at least 40% more to threaten the current dividend. The company has been cash flow positive for the 4 of the last 5 years. Finally, the 4% dividend gives the stock built-in price support. At these levels, CVX is buy.