Why Did Warren Buffett Buy Chevron?

Warren Buffett has been fairly inactive over the past year, preferring largely to hold and wait for good opportunities to come to him.

A rising stock market and an enormous cash stockpile drawing handsome interest rates have combined to make it difficult for the value investing legend to find good deals for Berkshire Hathaway.

One stock that saw quite a bit of activity from Buffett in 2023, however, was oil major Chevron (NYSE:CVX).

After selling over 50 million shares in the first three quarters of the year, Buffett seemingly reversed course and bought 15.8 million shares in Q4.

Why does Warren Buffett keep over 5.5% of Berkshire’s portfolio in Chevron, and why is he renewing his buying activity? We investigate whether CVX is a good buy today.

Lots to Like About Chevron

Warren Buffett’s market-beating strategy for investing has been summed up as buying wonderful companies at fair prices.

Using this as a guide to understand how Buffett judges investments, it quickly becomes apparent why the Berkshire Hathaway founder has taken such an interest in this energy company.

Chevron enjoys the combination of respectable net margins, little debt and an economically competitive position in an essential industry.

Over the last 12 months, the company’s net margin averaged 10.6%, resulting in earnings of $21.4 billion on sales of just under $201 billion.

The company also maintains a debt-to-equity ratio of just 0.1x, giving it significant latitude to invest its cash flows in growth initiatives, dividends and share buybacks instead of servicing debt.

It’s Not All Rosy

Nonetheless, it’s worth noting that Chevron is experiencing a significant decline in revenue and earnings, though this is nothing terribly unusual for a company in the often cyclical energy industry. Revenue was down 16.5% in Q4, with earnings declining by over 60%.

These declines reflect a broader correction as the world adjusts to the oil supply difficulties stemming from the Russia-Ukraine conflict.

Both full-year earnings and revenues are still well above their levels from a couple of years ago, suggesting that Chevron is still performing quite well on the longer time horizon Buffett typically considers when making his investment decisions.

With the conflict in Eastern Europe ongoing and the OPEC nations cutting production to maintain higher prices, it’s likely that oil producers, such as Chevron, will continue to enjoy a favorable pricing environment.

The Future Is Bright

Chevron is continuing to expand its business and widen its growth potential through acquisitions. In October, the company announced its acquisition of Hess Corp., giving it both expanded properties in the Bakken oil shale production region and a new oil field in Guyana.

This came on top of its completed purchase of PDC Energy in August, a deal that resulted in 300,000 net acres of new oil properties for Chevron.

Just as important for Buffett’s value investing strategy is the fact that Chevron is priced very reasonably. At 11.8x forward earnings and 0.8x earnings growth, Chevron shares offer modest pricing given the company’s potential future earnings.

For reference, Exxon Mobil trades at a similar forward P/E ratio at 11.3, but its price-to-earnings-growth ratio is a much higher 3.8x.

Why Did Warren Buffett Buy Chevron Stock?

Most likely, Warren Buffett bought Chevron stock because of its attractive 4.4% annual dividend, low debt to equity ratio and high profitability.

While analysts sentiment has shifted negative with 7 Wall Street researchers revising their estimates lower for the upcoming period, it remains positive overall.

A valuation argument paints a positive picture with fair value sitting at $178.05 per share according to the consensus of 25 analysts. If they are correct, Chevron has another 16.4% upside potential on the horizon.

Chevron Pays a Strong Dividend

Many of Buffett’s best investments over the years have been stocks that offered strong, consistent dividends that add to their total returns. This is also the case with Chevron, which currently yields 4.2% and has increased its dividend consistently over the last 37 years.

Because of Buffett’s long investing horizon, his stock picks often benefit from years or even decades of dividend growth.

In the last 10 years, CVX has raised its dividends at a modest but steady rate of about 4.4% annually. The company has also returned cash to its shareholders via share buybacks, including a notable $75 billion buyback authorization in early 2023.

Berkshire Hathaway Is Building Its Position in Energy

It’s worth noting that Chevron isn’t the only energy company Buffett is currently investing in.

Between two rounds of purchases in December and one in February, Berkshire Hathaway has boosted its stake in Occidental Petroleum by about 8.6% in recent months.

Going forward, it’s likely that the company will prioritize Occidental over Chevron. Berkshire has sought out and gained regulatory approval to buy up to 50% of Occidental.

Between Chevron and Occidental, it appears that Buffett is investing on assumptions of higher oil prices in the long run.

This view is likely a reasonable one, as many projections show oil prices remaining more or less flat in 2024 and declining only very slightly in 2025.

Chevron’s CEO sees even more price increases ahead, having projected prices of up to $100 per barrel due to supply constraints late last year.

The Allocation Argument

There’s little doubt that Chevron is a company that appeals to Warren Buffett or that he is comfortable with the stock making up a relatively large percentage of the Berkshire Hathaway portfolio. However, there is likely a much simpler reason for the buying and selling that took place in 2023.

Like all investment managers, Buffett and his team must periodically readjust the Berkshire portfolio to create an optimal allocation of the company’s invested capital.

As such, it’s quite likely that the backwards and forwards moves represent a rebalancing of Berkshire’s holdings rather than a fundamental shift in Buffett’s view of Chevron.

Is Chevron a Buy?

Although Buffett may just be rebalancing his enormous portfolio, there is a great deal to like about Chevron for other investors.

A combination of strong dividend income, continued share buybacks, strategic acquisitions and a low debt load all bode well for the stock in the long run.

Chevron also appears to trade at an attractive price point. Together, these factors point to Chevron as a good buy for many investors.

It’s important to note that Chevron is a conservative stock that is likely to produce stable, long-term returns and a reliable stream of dividend income.

The stock may not appeal to highly risk-tolerant investors seeking fast returns in fields like tech or biomedical innovation. For those willing to take the Buffett approach of buying solid companies at attractive prices and holding for the long run, though, Chevron seems to be a good candidate.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.