Key Points
Investors are always looking for a unique edge that helps them pick stocks. One simple approach to stock selection that has gained notoriety is to buy the five highest-yielding stocks in the Dow Jones Industrial Average (DJINDICES: ^DJI) , a system that has become known as the "Dogs of the Dow." Chevron (NYSE: CVX) is one of those "dogs" today, but is it worth buying this energy-tied business?
What does Chevron do?
Chevron is an integrated energy company, which means that its business spans across the energy sector. That includes energy production (the upstream), energy transportation (the midstream), and refining and chemicals (the downstream). Each of the segments operates a little differently and performs a little differently through the energy cycle. This is a key factor to keep in mind when you are looking at Chevron because this diversification helps to soften the peaks and valleys that are normal in the energy sector .
Given the importance of oil and natural gas prices to the top line, Chevron can't completely avoid the often dramatic and swift swings that happen in the energy sector. But it won't be as volatile as a company that is solely focused on producing oil and natural gas. Nor will it be as volatile as a business focused around the downstream, where both the inputs and the products are commodities. However, when low oil prices are hampering Chevron's upstream operations they may be helping its downstream businesses, which use oil and natural gas as inputs.
If you are looking for some energy exposure, Chevron is a good all-around choice. But that is only partly because of its diversified business model. Another important factor is the company's financial strength. With a debt-to-equity ratio of around 0.2, this integrated energy giant has a very strong balance sheet. That gives it the financial wherewithal to take on debt during energy downturns to support its business and its dividend. So Chevron's business is designed from the ground up to survive the inherent swings in the energy sector.
Is Chevron worth buying today?
Energy prices have been a little weak lately. And, as you might expect, Chevron's stock has been weak, too. It has dropped around 25% from its 2022 highs, when oil prices were stronger. But don't view that drop in a vacuum. Pure-play driller Devon Energy (NYSE: DVN) has seen its price decline by a whopping 55% over roughly the same span. Thus, Chevron's stock is performing just like you would hope in the current environment.
Investors dumping the shares, however, could be opening up an opportunity for investors who understand Chevron's financially strong business model. Notably, the stock's dividend yield is currently 4.8%. That's near the highest levels since the coronavirus pandemic sent U.S. oil prices below zero.
Or, to put it another way, it looks like Chevron is attractively priced today. That's clearly because of the drop in oil prices, which has had the expected impact on the company's revenue and earnings. But it hasn't stopped Chevron from supporting its dividend. That dividend has now been increased annually for 38 consecutive years. Given the strength of the balance sheet, there's no reason to believe that the dividend is at risk of being cut anytime soon.
The point of the "dogs"
Chevron is an excellent example of the "Dogs of the Dow" approach doing exactly what it is supposed to do. Chevron is out of favor but remains a financially strong company capable of returning value to investors via its lofty yield and growing dividend. Not all "dogs" end up being attractive investments, but Chevron looks like it is well worth your buying consideration today.
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