Better Buy: Chevron or All 30 Dow Jones Stocks?

You’re not crazy. Energy stocks increasingly seem as if they’re more trouble than they’re worth. The price of oil has become painfully volatile in recent years, so much so that refiners and drillers are regularly opting to cease operations while prices are suppressed. This of course (eventually) prompts price surges, exacerbating the headache waiting at the other end of the supply/demand spectrum. Besides, aren’t fossil fuels being phased out by renewables? It’s all enough to inspire investors to skip owning an individual oil and gas name altogether and simply step into a broad index like the Dow Jones Industrial Average (DJINDICES: ^DJI).

Before you write off the entire energy sector, though, know that there’s more of a future for these companies than the current rhetoric implies. Indeed, Dow constituent Chevron (NYSE: CVX) is not only one of the industry’s leading companies, shares of the oil “major” are currently a better bet than its blue chip index.

Perceived headwinds

That’s certainly not what the stock’s performance over the past year and a half would suggest. While the Dow Jones Industrial Average is now nearly 20% above its pre-pandemic peak and still reaching record highs, Chevron stock remains 15% below its price just before COVID-19 made landfall in the U.S. last year. In fact, Chevron is actually still well under its all-time high hit in 2014 — weakness that reflects a bigger, philosophical shift for the world’s energy market.

Image source: Getty Images.

The shift? Despite logistical challenges caused by the pandemic, the world still managed to install more than 1,400 megawatts of commercial solar-power production capacity in 2020, according to the Solar Energy Industries Association, pushing global solar power output potential to around 150 gigawatts. Wind power is having something of a moment too, as leaps in electricity storage using hydrogen fuel cells have made these environmentally friendly energy sources considerably more flexible. EV Volumes reports 3.2 million electric vehicles were sold last year, up from 2019’s 2.2 million, and up from less than half a million in 2014.T

There’s not a lot of reading between the lines that needs to be done with those trends.

Crude oil prices, by the way, are down by about a fourth for this same seven-year stretch. This price trend not being matched by lower refining and drilling expenses makes being in the business a less profitable prospect.

And yet, Chevron is not only surviving, but still sort of thriving in at least one respectable way.

Still a cash cow…usually

The graphic below is eye-opening, although not surprising. Earnings are still nowhere near the heyday sort of profits produced between 2006 and 2012 when oil prices were so firm and so well supported. But, barring the short-lived price implosion of 2015 and the unforeseeable (and temporary) impact of the coronavirus contagion, Chevron’s been making enough to pay all of its bills and pass a little bit extra along to shareholders in the form of dividends.

CVX Dividend data by YCharts

The long-term future looks reasonably bright enough to sustain these dividends, too, despite efforts to eventually eradicate the use of fossil fuels. A report the U.S. Energy Information Administration published just last year suggests that even as far away as 2050, 36% of the United States’ electricity will still be produced by natural gas, down from the current figure of 37%. The EIA further predicts that while it will be surpassed by renewables in the meantime, worldwide annual consumption of petroleum will still be about 20% greater in 2050 than it is right now.

It’s also worth mentioning that Chevron is still adapting to the inevitability of a renewables-first future. The company is partnering with Brightmark and CalBioEnergy, for instance, to produce biomethane, and its El Segundo refinery will be the country’s first to be capable of making gasoline with renewable biofeedstock material.

It’s not much, but they’re seeds that could readily grow into something more.

No power play — but a compelling rebound candidate

Neither Chevron nor its energy peers will ever be the titans they were back in the ’80s and ’90s, when oil was the world’s major widely available energy source. Their growth-oriented efforts than have since evolved to models that prioritize reliable income, and by extension, mostly reliable dividends. Work it’s doing on the alternative energy front is smart, but competition is fierce. Chevron’s sheer size won’t help it in the future like it did in the past.

With the stock being a laggard not just for the past year-and-a-half but for the past seven years, however, the market is pricing in more doubt than is actually merited. At the very least, Chevron’s above-average dividend yield of 5.2% makes it a compelling prospect for income investors. But even without such a strong yield, this stock’s present price underestimates the fact that the world is still decades away from weaning itself off of oil. It’s certainly a more compelling pick than an index fund based on the Dow right now, as the Dow Jones Industrial Average itself looks like it’s starting to struggle under the weight of the past year’s big 26% gain.

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James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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