uploads/2017/03/chevronfcf-1.png

Can Chevron Stand up to Exxon Mobil?

By

Updated

Chevron versus Exxon Mobil

Chevron (CVX) engages in integrated energy, chemicals, and petroleum operations across the globe through its subsidiaries. Exxon Mobil (XOM) is an explorer and producer of crude oil and natural gas. Both companies’ two reportable segments include upstream and downstream operations, but XOM has a chemical segment.

Chevron’s operating income has drastically declined over the past four years and actually went negative in 2016, which led to a net loss in 2016. Of course, falling commodity prices took a toll on CVX’s upstream revenue. The company has not been able to generate positive free cash flow for the past four years and has not initiated a share buyback for five years.

Article continues below advertisement

However, Chevron’s dividend per share remained the same between 2Q14 and 3Q16. Chevron’s dividend per share has grown at a CAGR (compound annual growth rate) of 7% during the past five years. Chevron current dividend yield is 3.9%. Chevron (XLE) (ERGF) (IYE) has a forward PE (price-to-earnings) ratio of 18.1x.

XOM’s financials

Exxon Mobil’s operating income, like Chevron’s, has noted a decline for the same reasons. The company’s 2016 operating margin dipped by 4.6 percentage points, which translated into a fall of 2.5 percentage points in its net margin and led to lower operating cash flow, while capital expenditures kept mounting.

XOM has not been able to generate enough free cash flow to keep up with its dividends over the past two years, but the company has initiated share buybacks every year for the past four years. XOM’s dividend payments have grown at an average annualized rate of 6.4% over the past 34 years, and the company’s dividend per share has grown at a CAGR of 10% over the past five years.

Exxon Mobil’s (VDE) (FENY) (FILL) current dividend yield is 3.6%, and it has a forward PE ratio of 16.6x.

Article continues below advertisement

The Trump effect

Both Chevron’s and Exxon Mobil’s interest in the deregulated markets of Mexico for oil production could be a concern for investors—particularly given the Trump administration’s anti-Mexico policies. Energy companies are aiming to capitalize on Mexico, despite the long waiting period for initial production. But the industry in Mexico has been suffering from low production, low prices, layoffs, equipment expenditures, and technological upgrades—all of which will likely have deep impacts on XOM’s future cash flows.

Still, XOM’s stable growth in dividends per share makes it an investor favorite, even while the company’s debt level and interest costs could remain concerns. XOM has recorded a growth of 2.7% in its dividend per share for 1Q17.

What’s the takeaway? Chevron has managed to increase its dividend per share, despite the fall in commodity prices—a positive sign for investors—having recorded a growth of 0.9% in its dividend per share for 1Q17. But XOM managed to generate positive segment revenue and earnings in 2016, driven by growth in its chemical segment, which places XOM in a better position than CVX for dividend chasers.

Advertisement

More From Market Realist