If you are looking to add exposure to the energy sector in your portfolio, you are probably considering Chevron (NYSE: CVX) as an option. It is a very good option, though that has to be explained a little bit because Chevron is almost always a good choice in the energy patch.
Here’s why you might want to buy Chevron stock now and hold it for the long term.
Chevron is what is known as an integrated energy company. This means that it has operations across the energy landscape, from the upstream (drilling) through the midstream (pipelines) and into the downstream (chemicals and refining). Having exposure to the various segments of the energy industry helps to soften the impact from the biggest problem energy companies face, volatile oil and natural gas prices.
Financial performance in the upstream is almost entirely driven by the price of energy. The midstream simply collects tolls as it helps to move energy from one place to another. And the downstream uses oil and natural gas as an input, so low oil prices are normally a benefit to the sector’s financial performance. All in, oil and natural gas prices still have a material impact on Chevron’s business, but this diversification across the energy industry helps to dampen the performance swings.
Although a U.S. company, with a material domestic presence, Chevron has a global portfolio. That helps smooth out its results over time as well, as it can invest in the areas where it sees the most opportunity and sell into regions where there is the most robust demand and strongest pricing. If you are looking for an energy stock, Chevron always covers a lot of ground.
Just using the integrated business model, however, isn’t enough to make an energy company a buy. Indeed, Chevron has more positive attributes to appreciate. For example, it has increased its dividend annually for 37 consecutive years. That’s an impressive streak given the inherent volatility of the energy sector.
Notably, during the coronavirus pandemic when European peers BP (NYSE: BP) and Shell (NYSE: SHEL) cut their dividends, Chevron was one of the integrated majors that stood by its dividends.
Chevron’s dividend yield today is also fairly attractive at 4.2%. The yield on offer from the S&P 500 index is a miserly 1.2%, and the average energy stock has a yield of roughly 3.1%. So Chevron is currently offering an attractive, reliable, and growing dividend despite operating in a volatile sector.
Meanwhile, Chevron has a strong financial foundation, including a very modest debt-to-equity ratio of 0.2. A rock-solid balance sheet gives the company the leeway to add leverage during the hard times, which allows it to keep investing in its business and paying that dividend. When the good times return, as they always have historically in the energy patch, management reduces leverage to prepare for the next, inevitable, industry downturn.
