Warren Buffett is one of the most popular names in the investment world. All of his moves are closely watched as investors try to replicate investment strategies of the Oracle of Omaha. Buffett has been a vocal advocate of equity investing and he remains bullish on this asset class.
The Warren Buffett-owned Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B) recently filed its 13F report for the December quarter. In Q4 of 2020, Berkshire initiated a new position in energy giant Chevron (NYSE: CVX). Berkshire bought 48.5 million shares of Chevron that are worth around $4.1 billion today.
Let’s see why Warren Buffett is bullish on this energy stock.
Chevron has a strong balance sheet
Chevron has strong fundamentals with a low debt to equity ratio of just 0.26x which is the lowest among peers. ExxonMobil (NYSE: XOM) has the second-lowest debt to equity multiple of 0.40x. Its low leverage has helped Chevron sustain its dividend and even continue capital expenditures during a volatile year.
The last year has been an unprecedented one for energy companies. Oil Futures were trading in the negative at one point in time. However, Chevron took advantage of this downturn to acquire Noble Drilling in a deal valued at $13 billion that includes $8 billion in debt.
While Chevron spent $13 billion in capital expenditures in 2020, this figure was 35% below when compared with 2019. Despite this pullback in CAPEX, Chevron increased production by 1% in 2020 to 3.08 million oil-equivalent barrels per day.
We can see why Warren Buffett is optimistic about Chevron given it was impacted by multiple macro-economic headwinds but still managed to increase production and decrease costs.
A dividend giant
Warren Buffett is a big fan of investing in companies that have the ability to generate sustainable profits and a steady stream of cash flows. This will basically help the firm distribute profits to shareholders in the form of dividends.
Chevron has increased dividend payments for 33 consecutive years and is better placed than peers to continue these payouts. Chevron stock is currently trading at $109.5 and pays annual dividends of $5.16 per share indicating a forward yield of 4.72%. So, a $10,000 investment in Chevron stock will help you derive $472 in annual dividend payments.
What next for investors?
Chevron has forecast to keep its organic capital spending between $14 billion and $16 billion each year through 2025. This capital program will double Chevron’s return on capital employed and allow the company to grow free cash flow at an annual rate of 10% through 2025. The forecast is on the assumption that the cost of Brent crude oil will average $50 per barrel.
Chevron reported a net loss in 2020 due to low oil prices. However, in the last three years, it derived close to $8 billion in asset sales that has helped Chevron to bolster its liquidity and lower debt.
Regarding the Berkshire investment in Chevron, CEO Michael Wirth told CNBC, “I can’t infer anything other than their investment decision would suggest that there’s some confidence in the long-term future of our company and our ability to generate value for shareholders over the long term.”
Chevron’s robust balance sheet, long-term financial stability, and tasty dividend yield make it a top bet for income and value investors.
Disclaimer: The writer is an experienced financial consultant who writes for Finscreener.org. The observations he makes are his own and are not intended as investment or trading advice.
