(This article was sent first to members of the CNBC Investing Club with Jim Cramer. To get the real-time updates in your inbox, subscribe here.)
After you receive this note, we will be initiating a position in Chevron (CVX), buying 350 shares at roughly $114.56. Following the trade, Chevron will represent roughly 1% of the Charitable Trust.
The broader markets are lower Tuesday as investors continue to struggle to estimate the impact of the omicron variant. With prices down Tuesday after a Monday rally, we think it's a good time to brush off the playbook we outlined last Friday. In our note, we recommended looking for companies with strong balance sheets, healthy dividend payments, and consistent share repurchase programs as stocks to buy. Companies with all three usually can withstand and find support in volatile markets. Due to ongoing uncertainties, investors should prepare for some volatile moments over the next couple of weeks.
Chevron just reported a fantastic third quarter with record free cash flow generation. Compared to pre-Covid levels, Chevron is generating so much cash because its operating costs are down, its upstream production is higher, and they have become much more capital efficient. The upshot of all of this is that Chevron generated more free cash flow in the third quarter than in any of its strongest quarters in 2008 and 2011 when oil prices were well over $100 a barrel. Think about this: Chevron's focus on cost efficiency and capital efficacy means that the company can still make a lot of money if WTI crude hangs out around $70 per barrel here, and we see plenty of leverage to the upside should oil prices move higher.
Attractive capital allocation policy
We also think Chevron can also work as a "slowdown" stock. Hear us out on this. If economic activity hits a speed bump, we could see interest rates slide. Lower interest rates are generally viewed as positive for stocks with big, cash flow backed dividend yields because the dividend payments become more attractive relative to the 10-Year. The dividend yield on CVX as of Monday's close was 4.67% and we believe it is well covered by the company's free cash flow. Chevron's dividend has grown 12% since before COVID, representing the biggest increase in the sector.
On top of dividend payments, Chevron's capital return program recently just got even better through the resumption of its buyback program. Management bought back $625 million worth of stock in the third quarter and has already said they plan to buy back roughly $750 million in the fourth quarter. We would not be surprised to see Chevron's buyback activity increase in the future. Management is on the record of saying that it will increase the buyback range when Chevron's net debt ratio is "comfortably" under 20%. Well, Chevron ended the third quarter with a net debt ratio slightly under 19%, meaning that the balance sheet is quickly approaching the level where management will increase the buyback range. Keep in mind that Chevron's focus on capital discipline means that the majority of the excess cash will be returned to shareholders via dividends and buybacks.
We view this purchase of CVX as the beginning of an investment and not a trade, so let's dive into sustainability next. One reason why we like Chevron over the other oil and gas giants is its leadership in this field. Chevron's focus is clear. They want to be the leader in efficient and lower carbon production of traditional energy, which they believe is in high demand today and will continue to be for years to come. Equally important, a goal of Chevron is grow its low-carbon business. What this means is that Chevron isn't going after crowded areas in renewables like wind and solar. Instead, they want to be the leader in fuels of the future and reduce the carbon intensity of these products. Think hydrogen, renewable diesel, sustainable aviation fuel, and RNG/CNG. This is so important because one goal of every industry is to lower the carbon footprint of their operations.
You can find Chevron's full climate change resilience report here. Jim also recently interviewed Chevron Chairman and CEO Mike Wirth to discuss their lower-carbon investments in renewable natural gas and hydrogen. The link to the interview is here.
We are putting on a starter position in Chevron at roughly 1% of the portfolio. As always, we never like to buy all at once when putting on a new stock position for the Charitable Trust. Our entry point may not always be the best price, and we plan to accumulate more shares into weakness. Also, the omicron variant has added a layer of volatility to the markets, and we want to be sure that we leave plenty of room to scale in.
The CNBC Investing Club is now the official home to my Charitable Trust. It's the place where you can see every move we make for the portfolio and get my market insight before anyone else. The Charitable Trust and my writings are no longer affiliated with Action Alerts Plus in any way.
As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Typically, Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If the trade alert is sent pre-market, Jim waits 5 minutes after the market opens before executing the trade. If the trade alert is issued with less than 45 minutes in the trading day, Jim executes the trade 5 minutes before the market closes. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. See here for the investing disclaimer.
(Jim Cramer's Charitable Trust is long CVX.)