What is the future of dividends at Chevron Corporation (NYSE:CVX)? That is the question in the mind of many investors as falling oil prices continue to bite. There have been fears that Chevron could be forced to vacate dividend payments to preserve cash during these trying times. Does dividend cut look real at Chevron?
If what the management of Chevron Corporation (NYSE:CVX) recently said is anything to go by, claims of potential dividend cut look out of place. It was Chevron’s CEO, John S. Watson who outlined the company’s financial priorities for the coming years during the 4Q2015 earnings call. In no uncertain terms, Watson talked of their number one financial priority being to maintain and improve dividends. He went on to say that Chevron actually has a strong balance sheet to cope with the current unhealthy conditions in the oil industry.
Can Chevron’s CEO make such a bold promise only to do the opposite shortly after? That doesn’t seem logical. That is why fears of potential dividend elimination look unfounded. However, the question that comes up in Chevron’s dividend commentary is where the money to distribute to shareholders will come from when the company’s debt is soaring.
Backing dividend payments
Chevron Corporation (NYSE:CVX) finished 2015 with net debt of more than $28 billion, having ballooned from $10.7 billion in the previous year. But Chevron has multiple ways to raise funds to distribute to shareholders in the form of dividends. The company is using a mix of capex cut, opex reduction and others to preserve cash. The savings can be turned over to back dividends. Additionally, the company is selling some of its non-core assets to unlock funds that it can use to pay dividends. It is a common practice that companies review their asset portfolio and eliminate those they don’t need and it is what Chevron is doing.
Chevron also has borrowing as an option to generate funds to return to shareholders.
Dividend at a cost
The truth is that Chevron Corporation (NYSE:CVX) will continue to pay dividends. The other truth is that the dividends in the current situation cannot be sustained by organic free cash flow growth. As such, the company will have to borrow and sell assets to maintain dividend payments, a strategy that appears to be unsustainable over the long-term.