Yahoo Finance Why It Makes Sense to Hold Chevron (CVX) in Your Portfolio
Energy giant Chevron Corporation’s CVX stock has remained stagnant over the past year. The San Ramon, CA-based integrated company has also underperformed the Oil/Energy space, its subindustry and the S&P 500 composite during the same period.
Over the past year, Chevron's stock has only increased by 2%, while the broader sector has risen by 13.2%, and the Zacks Oil and Gas International Integrated industry has gained 8.8%. Above all, the S&P 500 has surged nearly 27%.
Given this underperformance, investors are disappointed and uncertain about what to do with their holdings.
Image Source: Zacks Investment Research
However, we believe that Chevron is one of the best-positioned global integrated oil companies to achieve sustainable production growth and boast an impressive business model. The company does deserve to remain in your portfolio. Our investment thesis is also supported by a Zacks Rank #3 (Hold).
Let's examine the five primary reasons to hold Chevron stock.
Long-Term Investment Potential: Chevron’s long-term projects and investments in the oil and gas sector are designed to yield benefits over years or even decades, not quarters. This long-term horizon can provide substantial returns despite short-term market fluctuations. For investors with patience, Chevron's strategic positioning can result in significant future gains once the current market volatility subsides.
Strong Financial Base and Dividend Yield: Chevron maintains a robust financial structure with a significant shareholder payout. The company's dividend yield of above 4% is attractive, particularly for income-focused investors, offering a steady income stream even when share prices are stagnant. This financial stability can cushion the impact of short-term stock price volatility.
Strategic Acquisitions: Chevron's $53 billion takeover of Hess Corporation and its increased investments in key areas like the Permian Basin and Guyana position it for enhanced production and growth. These strategic moves are likely to pay off in the next few years, providing a solid foundation for future revenue and production increases that justify keeping the stock in your portfolio.
Capital Expenditure and Production Growth: Chevron’s commitment to increasing capital expenditure rising since 2023, coupled with expected production growth in 2024, highlights its focus on future expansion and efficiency. These investments are crucial for sustaining long-term growth and enhancing shareholder value, making it a prudent choice to hold the stock.
Industry-Leading Return on Capital: Despite recent performance issues, Chevron remains a leader in return on capital employed (ROCE). This metric is crucial for evaluating the efficiency and profitability of a company. Chevron's industry-leading ROCE suggests that it is well-managed and capable of generating substantial returns on its investments.
Why It’s Not the Right Time to Buy Chevron Stock
While Chevron has strong long-term potential, the current market conditions and specific challenges facing the company suggest that now may not be the best time to purchase additional shares.
The ongoing volatility in oil prices, driven by geopolitical events and OPEC+ decisions, poses significant risks to short-term performance. The broader energy sector is experiencing a period of uncertainty with potential over-supply concerns and fluctuating demand.
Moreover, the company's valuation remains relatively high, which means the stock might not offer an attractive entry point at this time. Chevron's current P/E ratio is significantly higher than most of its peers, except ExxonMobil XOM. Despite strong financial performance, the elevated valuation indicates that Chevron is expensive relative to other major oil companies, especially the European ones. This high valuation, combined with market volatility, suggests limited upside potential.
Finally, Chevron's planned acquisition of Hess Corporation faces regulatory scrutiny and legal challenges from ExxonMobil, which claims preemptive rights over the Hess stake, potentially delaying the merger's completion. If the acquisition fails, Chevron could be liable for a $1.7 billion breakup fee, adding financial risk. This uncertainty around the deal's completion introduces a significant risk factor.
It is advisable for investors to wait for a more favorable buying opportunity when these risks are mitigated, and Chevron’s valuation aligns more closely with its business fundamentals.
2 Energy Stocks to Buy
While we view Chevron as a conservative choice in the Oil/Energy space, investors might want to accumulate stocks like SM Energy Company SM and Sunoco LP SUN. Both the companies currently sport a Zacks Rank #1 (Strong Buy).
You can see the complete list of today’s Zacks #1 Rank stocks here.
SM Energy Company: SM beat the Zacks Consensus Estimate for earnings in each of the trailing four quarters. SM Energy has a trailing four-quarter earnings surprise of 13.8%, on average.
SM is valued at around $5.8 billion. SM Energy has seen its shares increase 81.8% in a year.
Sunoco LP: The Zacks Consensus Estimate for 2024 earnings of Sunoco indicates 41.1% growth.
SUN is valued at around $5.1 billion. Sunoco has seen its stock rise 23.6% in a year.
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Chevron Corporation (CVX) : Free Stock Analysis Report
Exxon Mobil Corporation (XOM) : Free Stock Analysis Report
Sunoco LP (SUN) : Free Stock Analysis Report
SM Energy Company (SM) : Free Stock Analysis Report
