gjg49

An Opportunity in Chevron

just how safe is the dividend??

by my calculation (and i err as frequently as anyone else, so i am open to correction) over the past 12 months, cvx generated $20 billion in operating cash flow and spent $21.1 billion on capital spending. if that is correct, then cvx did not generate a sufficient level of cash flow to pay the dividend over the past 12 months. if correct, cvx effectively "borrowed" (either consuming cash off the balance sheet or increasing external borrowing) by approximately $6.3 billion to pay the $5.2 billion in dividends over the past 12 months.

as of june 30, 2009, cvx also runs a net debt position of $4.7 billion (that is, total debt exceeds cash on the balance sheet--this contrasts with a $600 million net cash position at dec 31, 2008 and a $2 billion net cash position at june 30, 2008), albeit not very large relative to the size of the $161 billion asset base and $87 billion equity base. if the operating cash flow and capital spending remain on the same path, chevron will need to increase net debt to continue to pay the dividend at the same rate.

management may well be able to tweak the operating cash flow and/or capital spending to improve the free cash flow generation, but unless they do, i would be less comfortable about the sustainability of the dividend at the current rate. i would not expect a dividend cut imminently, but at the same time, things will need to improve to sustain the dividend at the current rate.