Should You Buy Chevron While It’s Below $150?

Chevron (CVX 0.47%) has a lot to offer as an energy investment, not the least of which is the dividend, which has been increased annually for 37 consecutive years and supports a high dividend yield of 4.4% currently. With the stock more than 20% below recent highs, should you buy Chevron? Here are some important factors to consider before making your final call.

What is Chevron doing in the energy industry?

The title is actually a trick question because Chevron does allwhich is why it is classified as an integrated energy company. But to be more specific, it has operations in the upstream segment (power generation), the midstream arena (pipelines and other transportation and storage infrastructure) and the downstream niche (chemicals and refining). Each segment of the broader energy sector operates slightly differently and has different market dynamics.

Bringing upstream, midstream and downstream businesses under one roof not only creates a diversified company that is further enhanced by Chevron’s global reach, but tends to help smooth out the ups and downs of the energy cycle. Commodity prices are the main driver of Chevron’s top and bottom lines, but the inherent variances won’t be as material as they would be if it focused solely on upstream.

Chevron is also focusing on the strength of its balance sheet. To put a number on that, Chevron’s debt-to-equity ratio is a minuscule 0.15 today. That would be a low number for any company, but it also happens to be the lowest figure relative to Chevron’s closest peers. This gives Chevron more leeway to sustain its business and dividends during the inevitable oil crises it will face. Simply put, Chevron is a conservative way to invest in the energy sector.

CVX Debt to Equity Ratio Data by YCharts

Is Chevron a buy under $150?

Chevron shares are below $150 today, which is about a 20% drop from the recent price peak of around $188 per share at the end of 2022. This could be seen as a solid entry point for investors of dividends looking to add energy exposure to their portfolios, noting the stock’s attractive 4.4% yield. after all S&P 500 the index is only around 1.2% or so, and the average energy stock, using Energy Select Sector SPDR ETF as a proxy, it has a yield of about 3.1%.

Now add in Chevron’s strong financial position, diversified business and long history of atmospheric energy downturns, continuing to reward investors with regular dividend increases. You can see where a conservative guy would make a wise choice to buy stocks if he’s looking for an energy investment right now.

CVX data by YCharts

But there’s a problem: Oil prices are actually pretty high right now. Sure, they’ve been higher, but they’ve also been much lower. Given the nature of the oil industry, it is highly likely that Chevron will be dealing with significantly lower energy prices at some point in the not-too-distant future.

Chevron is ready, noting its very low debt-to-equity ratio, but that won’t change the fact that revenues and earnings fall when energy prices fall. This, in turn, will cause investors to sell the stock.

In fact, in the past decade, Chevron’s stock has fallen below $80 per share three times. The dividend yield, meanwhile, rose as much as 9% at one point. This was an extreme peak related to the coronavirus pandemic. But 6% is not out of bounds, having been reached three times as well.

It wouldn’t be shocking at all to see a deep decline in oil that drives Chevron stock down deep and pushes the yield to materially more attractive levels. Or, to put it another way, if you want to buy Chevron at a bargain price, you’ll want to wait until the next big oil sale.

Chevron is a good company

Here’s the thing: For long-term investors with an income focus, Chevron is probably a good choice right now. You won’t get the best possible price, but you’re probably buying it at a fair level if you add the stock under $150.

However, if you’re willing to watch and wait, you can probably buy it at a much better price at some point in the future given the inherent volatility of the energy sector. The only caveat here is that you should get to know the company today and create a concrete plan for when you want to buy it (perhaps when the yield hits 6%).

Indeed, the best time to buy Chevron is probably when the fear of owning it seems greatest, and if you don’t plan ahead, fear could cause you to miss out.