Chevron Dividend Payment Commitment Should Be Revised
In the current economic conditions, its time for the company to revise its priorities.
Chevron has been hit by the current oil and gas crisis like many others. It is open fact that the derailing oil and gas economy makes the satisfactory performance of the energy corporation questionable. A lot of investors and analysts are intrigued to find out about the energy corporation’s sustainability.
For the first time in 13 years, the US energy sector organization has reported the worst quarterly profit. It was among those companies who, for more than 25 years, have increased the payments of dividends. Moreover, it spends around $8 billion a year to meet the dividend payments. It also envisages increasing the quarterly dividend and to make it happen, it has already undergone debt issuance and capital spending cuts.
The fluctuating oil and gas prices deter Chevron’s vision. Currently, when oil and gas prices are at significant low levels, its ability to pay the dividend to its shareholder appears blurry.
Before the crisis, the Californian behemoth meets its obligation of dividend payment from free cash flow but the recent economy creates nothing of such sort to let Chevron pays its shareholders. Theoretically, its $13.2 billion cash can pay off the dividends for over one and a half year. However, it will not be prudent for it to part with its liquid asset under such economic conditions.
In the earlier years, Chevron attained a debt of $17.66 billion to pay off its dividends amounting to $22.42 billion but the same practice cannot be further carried out. The current economy does not favor the further acquisition of debt where the fear of liquidity crunch dangles over the head. The business has the obligation to pay off its debt of $1.1 billion by 2019 excluding the long-term debt of $18 billion. Naturally, with the probable interest payments and debt obligations, it will not spend its cash on the dividends.
Chevron, however, is still confident to meet its dividend payment obligation. It speculates that by 2017, it will again be able to cover its obligation from free cash flow. Moreover, it does not receive any premium from its share issuance. The company has never disappointed in paying off the dividends but now the time demands a reasonable cut in the dividend.
Although the company has never practiced the stoppage of dividend but for its sustainability, it has to make bold decisions. The oil and energy economy does not look favorable for the time being. Moreover, this type of industry fluctuates at alarmingly higher rates so the assumption of getting back on track in a couple of years is not strong.
Overall, before being drowned in the debt burden, the company should come up with a strong and bold decision regarding its dividend policy.