Chevron or Exxon, What Dividends Should Investors Have Today?
The world is in the midst of a major energy transition as it seeks to reduce the use of carbonaceous fuels such as oil and natural gas. However, this will likely be a slow change given the massive scale of this endeavor. And that means more aggressive investors can still find opportunities in the oil business – although sticking to the biggest, most diverse, and strongest names is probably a good choice.
This means that the integrated American giants ExxonMobil (NYSE: XOM) and Chevron (NYSE: CVX) should be on your shortlist. But which one is the best bet? Here are some essential facts to consider.
1. Notable similarities
Although Exxon and Chevron are not exactly interchangeable, they are very similar. Both have significant upstream (drilling), mid-term (pipeline) and downstream (chemicals and refining) operations. They also have massive reach and global portfolios, despite being based in the United States, which is one of the largest energy producers in the world. On the drilling side, they each have an offshore and onshore exposure. In other words, they are both one-stop-shop investments for those looking for exposure to the global energy sector.
What sets them apart are the nuances – which end up being very important today given the changing market environment in which they operate.
Image source: Getty Images.
2. Differences in dividends
Exxon’s return is 6% today. Chevron’s dividend yield is 5.3%. Exxon has increased its dividend annually for 38 consecutive years, while Chevron is a few years behind at 34 (right now they’re both dividend aristocrats). Historically, both have increased their dividends each year at an average single-digit rate.
Prior to giving the advantage to Exxon, however, it has not increased its quarterly dividend since the second quarter of 2019. If it does not increase the payout in the fourth quarter of this year, the dividend sequence shown below above will end.
Chevron has increased its dividend in 2020 and 2021. This speaks to a company that is in a better financial and industrial position, which will be looked at more closely below. But the main takeaway is that the extra return from Exxon comes with additional risk and may not be the best option for more conservative income-oriented investors.
3. Grow or stumble
To be fair, Chevron and Exxon are well-run companies with an impressive track record of operating their assets. However, business moves in cycles, and today Chevron is simply outperforming. Before the industry downturn in 2020 precipitated by the coronavirus pandemic, Chevron was emerging from a spending spell, while Exxon prepared to step up its investment plans. Thus, Exxon was hit harder than Chevron when energy companies were forced to pull out because it had to spend more money to prevent production from plummeting. Chevron was at a point where he was benefiting from past spending.
Although oil prices have recovered from their worst levels, this dynamic remains in place. Chevron’s spending needs are simply smaller than Exxon’s and therefore are likely to be more manageable.
4. The foundation
This difference is underscored by the fact that Chevron and Exxon have essentially switched positions when it comes to balance sheet strength. Energy companies used debt to fend for themselves during the recession. But because Chevron’s needs were smaller, he came out on the other side in better financial shape. To put a simple number on this, Chevron’s debt-to-equity ratio is about 0.33 times, compared to 0.38 times that of Exxon. While these are roughly similar numbers, the important part of the story is that this is a reversal of the recent historical trend, again suggesting that Exxon is in a more position. weak than Chevron today.
CVX Debt to Equity Ratio Data by YCharts
It’s also worth noting that while Exxon was essentially shutting down the hatches during the pandemic, Chevron made an opportunistic acquisition to ensure it was taking a stronger company out on the other side. This is a testament to the different positions of the industry here and underlines that Chevron is, indeed, the strongest company at the moment.
5. The long-term future
Chevron and Exxon have largely decided to stick to their knitting in the oil and gas space, preferring to tiptoe into the clean energy realm. They have both been pressured by investors to act faster. If they respond to these demands, none of them act to the same degree as their European peers. This could put off some investors. However, given Chevron’s relative strength today, he seems in a better position to change than Exxon.
Exxon ended up losing a board battle with a dissident shareholder that actually involved the company’s clean energy plans. Chevron, without a similar fight, has announced plans to triple its investment in clean energy. It’s still a modest overall investment compared to what it will spend in the oil space, but avoiding the fight that Exxon has undertaken is a statement investors should watch out for. This suggests that Chevron is more willing to adapt over time than its counterpart, which should be viewed favorably at this time. Exxon is also ramping up its clean energy plans, but it took a lot more effort to get the direction moving, which isn’t as good as the world is changing around these two energy giants.
In fairness, Exxon has likely been targeted for the board battle because of its name recognition. But that doesn’t change the visual result here, which ends up favoring Chevron.
It’s close, but there’s a winner
When you add it all up, unless your only concern is buying the stock with the highest yield, Chevron continues to appear to be better positioned than Exxon. Sure, you’ll have to accept a slightly lower dividend yield, but the financial strength, dividend growth, and positioning of the company are likely worth a higher price.
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Reuben Gregg Brewer has no position in the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.