Coca-Cola Is a Passive Income Powerhouse, but So Is This Cash-Gushing Oil Stock That Plans to Pay Over $11 Billion in Dividends by the End of the Year

Daniel Foelber, The Motley Fool

Thu, Nov 14, 2024, 1:23 AM 5 min read

Managing through the cycle

International energy giants can't control oil and gas prices, but they can improve their production portfolios to ensure they can achieve good profit margins even at lower prices. Chevron has been doing just that.

On its third-quarter earnings call, Chevron said that around 75% of its locations can break even below $50 per barrel. For context, West Texas Intermediate (WTI) crude oil prices, the U.S. benchmark, averaged $77.58 per barrel in 2023. And even during the collapse in 2020, WTI still averaged $39.16. So, building a portfolio around $50 oil provides a nice margin for error to do well even in a lower oil price environment.

In its earnings release, Chevron said that asset sales in Canada, Congo, and Alaska are part of its plan to divest $10 billion to $15 billion by 2026, with further structural changes expected to reduce costs by $2 billion to $3 billion from 2024 to the end of 2026. So Chevron's breakeven could fall even more in the coming years.

For the recent quarter, Chevron grew worldwide net oil equivalent production by 7% thanks to higher U.S. and Permian Basin production. The higher production helped offset lower oil and gas prices. All told, Chevron's upstream earnings only fell 20% compared to third-quarter 2023. But overall earnings came in at just $2.48 per share compared to $3.48 per share in the same quarter last year -- mainly due to a substantial slowdown in Chevron's downstream business.

Still, Chevron's free cash flow (FCF) for the first three quarters of 2024 was $10.7 billion compared to $11.7 billion for the same period last year. The company's ability to generate substantial earnings and FCF even in a mid-cycle price environment showcases why Chevron has an elite upstream portfolio.

Returning capital to shareholders

Like most oil and gas companies, Chevron's profits evaporated during the COVID-19-induced downturn. In fact, it reported a net loss of $5.54 billion in 2020. Despite the loss, Chevron not only kept paying a dividend, but also raised the payout as it has done for 37 consecutive years.

Chevron delivered for its shareholders despite the lousy year due to the strength of its balance sheet. As the oil and gas industry recovered, Chevron used outsize profits to reward its shareholders even more with buybacks and dividends, and still have enough dry powder left over to pay down debt. Over the last three years, Chevron has reduced its share count by 6.9% and increased its dividend by 21.6%. It finished the third quarter of 2024 with a net debt ratio of 11.9%, which was higher than 8.1% in Q3 2023 because Chevron has been ramping up its spending. Still, the leverage ratio remains at a very healthy level. Chevron's net debt ratio shows the company's leverage net of cash balances. The lower the net debt ratio, the less the business depends on debt.

Chevron stock is an excellent way to generate passive income

Given the cyclicality of the oil and gas industry, it is rare to find a financially healthy company with a clear path toward future earnings growth, a stable and reliable dividend, and a compelling yield. Chevron checks all those boxes. Its 4.2% dividend yield is considerably above the S&P 500 average of 1.2%. Chevron isn't an expensive stock either. On the conservative end, it will likely finish 2024 booking over $10 per share in earnings, giving it a price-to-earnings ratio under 16, which is attractive, given Chevron isn't even operating in a booming oil and gas environment.

All told, Chevron remains a good value and an excellent way to boost your passive income stream.

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Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool has a disclosure policy.

Coca-Cola Is a Passive Income Powerhouse, but So Is This Cash-Gushing Oil Stock That Plans to Pay Over $11 Billion in Dividends by the End of the Year was originally published by The Motley Fool

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