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Warren Buffett, who loves investing, hasn’t been investing much lately. In the fourth quarter of 2023, Buffett bought just three stocks. berkshire hathaway‘s portfolio. chevron (NYSE:CVX) was one of them.
Buffett increased his stake in oil and gas giant Berkshire by 14.4% in the fourth quarter. Chevron ranks as his fifth-largest holding in the conglomerate’s portfolio. The simple fact is that Mr. Buffett is accumulating these high-dividend stocks. I would like to introduce four reasons why I think so too.
1. The price is fair
According to most indicators, the stock market commands a premium price.of S&P500For example, it trades at over 21 times forward earnings. The long-term average price-to-earnings ratio of the index is approximately 16 times.
Chevron stands out as a company with a healthy valuation in a high-priced market. The expected earnings multiple for oil stocks is approximately 12 times. This is well below the S&P 500’s multiple and lower than the energy sector’s valuation.
However, this attractive valuation isn’t because Chevron is struggling. The company generated approximately $201 billion in revenue last year. It posted a profit of $21.4 billion. Chevron had total cash of $8.2 billion at the end of 2023.
2. Expectations for a rise in crude oil prices
Chevron’s fate depends on oil prices. If the price is too low, the company cannot make a profit. But if they are high, Chevron will mint money. I expect oil prices to rise in the next few years. I think Buffett agrees.
The legendary investor has not explicitly stated that he predicts oil prices will rise. But he told CNBC last year that he fully expects oil production levels to remain at least at current levels five years from now, despite the increased deployment of renewable energy sources.
Buffett is also a big fan. western oil CEO Vicky Holub. (Not surprisingly, he also bought Oxy stock for free.) Holub recently said there will be a supply shortage in the global oil market by late 2025. And she believes supply issues will be long-term.
I don’t know about Hollub’s timing, but she may be right. However, I wouldn’t be surprised if the combination of increased demand and relatively stable production levels creates a shortage in the not-too-distant future. If that happens, Chevron will be a big winner.
3. The $4 Trillion Lottery
One of Chevron’s top competitors exxon mobilbelieves the carbon capture and storage market could reach $4 trillion by 2050 and is investing heavily in developing this technology. So is Chevron.
Chevron wants to capture 25 million tons of carbon dioxide per year by 2030. The company’s Bayou Bend Carbon Storage Project ranks as one of the largest projects in the country, with a storage capacity of over 1 billion tons.
There are many technical hurdles to jump to realize the full potential of carbon capture. Probably it will never be. But I think carbon capture is a great lottery ticket that comes with investing in Chevron.
4. Get rewarded for waiting
True, oil prices have not yet risen and carbon capture remains a dream for now. But I like that Chevron pays me to wait, and they pay me a pretty penny.
The company’s dividend yield is currently close to 4.2%. Chevron has increased its dividend for his 37th consecutive year. The company has had the most impressive dividend growth rate in the oil and gas industry over the past five years, more than double that of its closest rival.
But dividends aren’t the only way Chevron is paying investors to keep them waiting. The company returned nearly $15 billion to shareholders last year through share buybacks, a 32% increase from 2022.
Pay attention to Mr. Buffett’s movements
I don’t think anyone should buy stocks just because it’s Mr. Buffett. I did not do it. However, if he appears to be particularly bullish on a stock, it’s wise to pay attention. His reasons for investing may be compelling. Buffett hasn’t said why he’s raising Berkshire’s Chevron stock, but I suspect his rationale is similar to mine.
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Keith Speights has held positions at Berkshire Hathaway, Chevron, and ExxonMobil. The Motley Fool has positions in and recommends Berkshire Hathaway and Chevron. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
Warren Buffett invests in this high dividend stock. Here’s why I think so too:Originally published by The Motley Fool
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