Chevron Stock (NYSE:CVS)

Chevron (NYSE:CVS) is one of the biggest oil and gas companies in the world. The market capitalization of the company is more than $300 billion, and the dividend yield is about 3.5 percent. Even though the company has a lot of assets and is planning to buy back $75 billion of them, its earnings show that it is overpriced at the current price.

How Chevron Did in 2022

Chevron had record results in 2022, but it seems unlikely that this will happen again if there isn’t the same level of supply scarcity.

The company made an incredible $35.5 billion in sales last year, giving it a P/E ratio of around 10. The company’s CFFO was just under $50 billion, and its FCF was over 10% because of capital investments. With share repurchases, the shareholder yield goes up to just over 7%. The dividend yield is just over 3.5%.

The company’s debt ratio is low, which shows that the company’s finances are in good shape overall. But the fact that it barely made double digits in a great year shows how much it is worth.

How Well Chevron Does Financially

Based on how well the company’s finances are doing, it looks like it will be hard for it to make long-term returns that are good for shareholders.

Chevron’s FCF for the year was well under $38 billion, which is a 12% FCF yield in a good year. The company gave a little more than $22 billion, or about 7%, back to investors and used the rest to pay off debt and improve its overall financial health. The company’s net debt is not too high, and it has continued to make investments.

The company’s finances got better until 2022, which was great.

The History of Chevron

Chevron’s past shows that the company is expensive and will have trouble making money in the future.

Chevron’s history of buying back its own shares is tied to the price of crude oil. This makes it a risky way for shareholders to make money after getting the 3.5% dividend. Above, it’s easy to see that it’s not stable. In 2022, the company will buy back a few percent of its shares, which will be a new high of more than $10 billion. But its share repurchases over the past year have been all over the place.

Since 2004, the company has bought back more than $65 billion worth of its own shares, which is about $3.5 billion every year. Plus the dividend, that’s an annualized yield of 1%, for a total shareholder yield of just under 5%. The long-term shareholder yield is low because the company gives most of its cash flow back to its shareholders.

The company buys back an average of $95 per share. This is a lot, given how many shares have been going for recently, but it is not unusually high.

Guidance

The projection from the company shows how expensive Chevron stock is.

The company expects production to stay pretty much the same. Dividends are expected to be 3.6%, and even if the company bought back all of its shares every year, that would still only add up to about 4%. That works out to a total return of about 8% per year. With oil prices so high, it’s hard for the company to make so much money.

When oil prices go back to their long-term average, we think the company’s earnings will go down. This will make it harder for the company to make enough cash flow to support its valuation.

The Company Is Too Expensive

Chevron is a strong business. The management of the company has made a lot of good decisions. Long before the rest of the market, the company built up a large portfolio of assets, which included some amazing and expensive Australian assets. Its valuation is higher than that of many other companies because it always makes smart decisions.

The company is now too expensive to be worth it. We don’t see any way for it to do better than the mid-single-digit long-term returns it gives now.

Thesis in Danger

Our argument is most likely to fail if Chevron does better in a higher-priced environment. This is clear from the fact that the company has been making money over the past year. Assuming that prices stay higher than expected in the long run, this can help justify the company’s value and give shareholders big returns.

Bottom Line

Chevron is a great company, and it did great in 2022. It gave its shareholders a lot of money by buying back a lot of shares and paying dividends over and over again. As long as oil prices stayed high, the company’s wide range of investments did very well. But the history of that cash flow shows how unpredictable it is.

We expect oil prices to drop to a new long-term average. The market has put a very high value on the company. Even though the business is well-known and has good assets, the company’s value is just too high. At its current price, we think it will be hard for the company to get returns of more than the mid-single digits. This makes Chevron stock a bad investment.

Featured Image: Unsplash @ Luis Ramirez

Please See Disclaimer