Sorry, Chevron Shareholders, but That "Very Secure" Dividend May Not Be So Safe

The timing of the announcement couldn't have been any unluckier. In early March, before the novel coronavirus outbreak turned into a global pandemic and OPEC opted to keep pumping oil at its previous pace, crude prices were tepid but at least stable. Chevron (NYSE:CVX) had every reason to believe it would be able to fund up to $80 billion worth of dividends the company suggested were in store over the course of the coming five years. Since then, the price of West Texas Intermediate (WTI) oil has fallen by more than $23 per barrel, to roughly $24. The price of Brent crude has slipped to a value of around $33. It's unlikely CEO Michael Wirth saw the world change as it has in just the past three weeks.

The 2015 oil meltdown serves as an example of what can happen when a dividend is arguably over-prioritized. Chevron maintained its dividend in the midst of that nightmare, but long-term debt grew from less than $28 billion at the end of 2014 to $33.6 billion by the end of 2015, while its cash and near-term receivables fell by $5.6 billion. Its cash balance fell again in 2016, and debt grew again as well. Moving into this sort of fiscal scenario makes it trickier to invest in growth once oil prices recover, which in the end has the potential to limit future dividend growth. In simplest terms, everything is a trade-off. Your job as an investor is just making sure the trade-offs are worth it for the long haul. This one may not be.

Source: Motley Fool

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