There might not be an investor who has done it as well for as long as the great Warren Buffett. Nicknamed the Oracle of Omaha, Buffett is still actively involved in key decisions at Berkshire Hathaway, the holding company he's managed for decades. Berkshire Hathaway has aggressively raised its cash to a staggering $325 billion, selling lots of stock to make that happen.
Buffett raising so much cash could be a sign he sees little value in the market and is preparing for a potential downturn.
Buffett has trimmed some stocks more than others. Integrated oil and gas company Chevron (CVX 0.78%), for example, is Berkshire's fifth-largest position, and Buffett only sold small amounts in the first and second quarters of 2024 and didn't sell any in the third quarter.
Here's why Chevron might appeal to Buffett and why investors should consider the stock a strong buy to kick off 2025.
Buffett loves dividend stocks, and Chevron delivers
Many of Buffett's investments are stocks with a history of increasing dividends. Here are Berkshire Hathaway's top five holdings, followed by the number of consecutive years each company has increased its dividend:
- Apple: 12 years
- American Express: three years (it froze the payout during the height of the COVID-19 pandemic, but didn't cut it)
- Bank of America: 11 years
- Coca-Cola: 62 years
- Chevron: 37 years
Chevron's dividend growth streak is especially impressive because the energy industry is cyclical, meaning profits fluctuate based on commodity prices and economic ups and downs. Chevron's ability to raise its dividend through multiple recessions and a global pandemic (during which oil prices went below zero for the first time) is a loud statement about management's ability to operate the business.
Additionally, the stock yields a generous 4.5% at the current share price, backed by a manageable 62% payout ratio (using 2024 earnings) and a high investment-grade balance sheet rated AA- by S&P Global. Chevron's debt-to-equity ratio is near its lowest level in a decade, so the company is plenty prepared for the next downturn in the energy markets.
Chevron represents a dependable, high-yield, income-producing asset that dumps cash into Berkshire's balance sheet. It can do the same for your portfolio.
Chevron is in a good position for the future
During the past decade, America has become an energy powerhouse on strength in the Permian Basin, a resource-rich region in the Southern United States. Chevron plans to operate heavily in the region, aiming to achieve 2,200 locations by 2027 and expand to more than 6,600 locations from 2028 to 2040.
The company has also agreed to acquire energy company Hess in a stock-funded deal valued at nearly $60 billion to give Chevron access to high-growth assets in Guyana. Archrival ExxonMobil has sued to block the merger, arguing it has preexisting rights due to a joint venture with Hess and another company. An arbitrator could rule on the case sometime this year.
Chevron has expressed confidence in completing the merger, which would help the company grow during the next decade and beyond. However, this is not a make-or-break scenario. Existing projects are coming online to increase production by 3% annually through at least 2027 (management anticipates free cash flow increasing by 10%). Of course, Chevron could pivot and look elsewhere if the Hess deal fails.
The stock appears to offer value today
Chevron's stock has drifted lower during the past two years. Oil prices have slipped from $120 a barrel to the low $70s during that stretch, and the uncertainty of the Hess acquisition doesn't help things. But ups and downs are par for the course with energy stocks.
Valuing Chevron can be difficult because its earnings can fluctuate so much. One of the cool things about well-established dividend stocks is you can use the yield as a baseline for value. Today, Chevron's yield is 4.5%, which is slightly above its average during the past decade:
CVX Dividend Yield data by YCharts
The yield spike in 2020 was due to historical events related to the pandemic. Strip that out, and Chevron's yield is nearly its highest since 2016. Yet the company has a confident path to higher production and cash flow, a potential growth catalyst in Hess, and a stellar balance sheet with its lowest leverage ratio in years.
Therefore, the stock's higher yield isn't a warning sign but a buying opportunity. The stock will probably fall further if a recession occurs, but you can at least add more shares, knowing the company can handle the adversity. Buffett's reluctance to sell Chevron while raising so much cash aligns with the fundamentals -- Chevron stock offers value at these prices.
