Chevron (CVX) - a holding in our Income Portfolio - recently reported Q4 result; at first glance, the results appear to be a major disappointment, explains Jim Pearce, growth and income expert and editor of Investing Daily's flagship advisory service, Personal Finance.
The company reported a loss despite rising oil prices during the quarter. On an adjusted/diluted basis, Chevron lost one cent per share compared to a profit of $1.49 during the same period last year. The Wall Street analysts following the company were projecting a per-share profit of 7 cents.
However, Chevron's Q4 headline EPS (earnings per share) number is misleading. The company decided to "get all the uglies out" in one period rather than carry them into this year, including a $120 million one-time charge related to its acquisition of Noble Energy last year.
Converting Chevron's international sales to the U.S. dollar cost the company another $534 million in negative currency adjustments.
During the past year, Chevron aggressively cut costs and raised cash to bolster its liquidity. It reduced capital spending by 35% in 2020 and sold $2.9 billion of non-core assets. As a result, the company's year-end cash balance of $5.6 billion is only slightly less than where it ended the previous year.
As a show of strength in its balance sheet, the company's board of directors approved a quarterly cash dividend of $1.29 payable on March 10 to shareholders of record as of February 17.
That is the same level the company paid out last year and is 10 cents higher than its 2019 quarterly dividend payment. At a recent share price of $86, the upcoming distribution works out to a forward annual dividend yield of 5.9%.
Despite the big miss on earnings, CVX traded down only a few percentage points after that news was made public. Although the analysts that follow Chevron did not see this move coming, they also understand the long-term benefit of resetting the company's financial condition at this time.
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The economic impact of the coronavirus pandemic is still being felt by the energy sector as demand for gasoline remains suppressed, and that will most likely continue through the first half of this year if not longer.
At the same time, the environmental restrictions imposed on the oil industry by the Biden administration means most E&P companies will be doing less exploring and more producing.
In hindsight, Chevron's acquisition of Noble and its considerable inventory of proven reserves could pay off handsomely over the next several years. New drilling permits will be hard to come by, so existing wells will become increasingly valuable. We are raising our buy limit for Chevron to $100.
