Our 2019 market view remains cautious as continued pressures from a macro-economic standpoint weight on an already tenuous technical landscape. Based on these views, we feel a “safety-first” oriented approach with a focus on high-quality, well-managed companies is the best way to move forward in the new year, notes Zach Jonson, senior portfolio manager for Stack Financial Management.
Chevron (CVX) — our top value-oriented pick for 2019 — is one of the world's largest integrated energy companies with exploration, production, and refining operations that span the globe. The company has its hands in all aspects of the energy life cycle including upstream, midstream, and downstream/chemical operations which gives them the ability to navigate the ever-changing commodity environment.
Chevron’s high-quality assets allow for strong profit growth and free cash flow generation in a wide range of oil price environments, making them an ideal holding for 2019.
The collapse in oil prices that took place from the latter part of 2014 until early 2016 forced companies within the Energy sector to recapitalize and focus on balance sheet improvement. Chevron’s scale and efficiency allowed them to weather the storm better than most as they were able to maintain a consistent dividend payout throughout the cycle.
In fact, in January of 2018, Chevron raised its quarterly dividend by 4% to $1.12, marking 30 straight years of annual dividend payout increases. As oil prices rebounded, Chevron’s management team remained steadfast outlining a plan that focused on dividend growth, balance sheet strength, and the utilization of surplus cash for repurchases.
As we stand today, Chevron is on track to produce multiple years of positive Free Cash Flow driven by recently completed major capital projects. The completion of these projects allows Chevron to reduce capital spending over the next few years while still maintaining the ability to ramp up production.
From a valuation standpoint, shares are trading at 12.9 times 2019 EPS estimates which is well below the 10-year average of approximately 15 times. From a cash flow standpoint, Chevron provides investors a forward FCF Yield in excess of 6%, which coupled with a 3.9% dividend yield, offers investors ample return to offset possible oil price volatility.
In a sector dominated by highly cyclical investment opportunities, CVX is a true high-quality story. The company is a well-managed, cash-oriented firm that offers strong production growth when most peers are struggling to lower costs. Chevron offers investors the ability to maintain exposure to the volatile energy sector while still maintaining a “safety-first” mentality.
(Note: Clients and individuals associated with Stack Financial Management hold positions in, and may from time to time make purchases or sales of, this security.)
