Passive income in a bear market? 1 share of Warren Buffett bought

Investors have had a tough time this year. The S&P 500 has fallen by 20% since the beginning of the year, while it is technologically heavy Nasdaq Composite is down 34% and firmly in a bear market. If you are an investor looking for passive income in these market conditions, one stock worth your consideration and one that Warren Buffett bought is Chevron (CVKS 3.09%).

Chevron has done a great job of raising its dividend for decades. Even during the pandemic, when oil prices plummeted, Chevron was one of the few oil and gas companies that maintained and even increased its dividend payout. Here’s why this Buffett stock can be a great source of passive income in a bear market.

A well-balanced business that results in a growing dividend

Chevron runs a balanced business in the oil and gas industry, making the stock less volatile than its peers. Its upstream operations include the exploration, production and transportation of crude oil and natural gas.

This segment has benefited from higher oil and gas prices and generated record profits for the company. Its downstream operations include the processing of crude oil into petroleum, the transportation of refined products through pipelines and the operation of gas stations around the world.

Chevron’s operations are balanced across the supply chain, making it less vulnerable to changes in oil and gas prices and providing more stable earnings compared to its competitors. This balanced business is a big reason why Chevron has rewarded shareholders with increasing dividend payouts for 35 consecutive years.

Higher oil prices led to record cash flows

Like most oil and gas companies, Chevron is benefiting from higher oil prices. The pandemic and the associated lockdown and travel restrictions have hurt oil prices, which have traded below $30 for about two months. Since then, oil prices have risen — to the delight of those oil and gas companies.

After the Russian invasion of Ukraine, oil prices soared to over $130 per barrel. Oil prices remained high throughout the year, helping pave the way for Chevron’s staggering profits and cash flow. Chevron’s nine-month net income was $29 billion, a 175% year-over-year increase. Its cash flow from operations this year is a whopping $37.1 billion.

Brent crude oil spot price chart
Data from ICharts.

A word of caution when investing in energy stocks

Energy companies have been doing pretty well, but investors can’t expect this to continue forever. The business is very cyclical, so it works well when prices are elevated. As a result, its earnings suffer when oil prices fall again. However, the good news is that Chevron’s break-even price to maintain the dividend and some buybacks is around $50 a barrel.

One thing that could keep a floor on oil prices is the US buying oil to replenish its Strategic Petroleum Reserve (SPR). Since the Russian invasion of Ukraine, the US has withdrawn 180 million barrels from the SPR.

The US plans to buy back about one-third of the withdrawn barrels and recently announced a plan to buy 3 million barrels to start the process. It aims to replenish its reserves at around $68 to $72 per barrel, which could keep oil prices high.

Other global headwinds may keep oil prices elevated next year, such as the reopening of China. According to comments made by Energy Aspects Research Director Amrita Sen the wall street newspaper, “The pent-up demand from China will be huge.”

OPEC production cuts could also prevent oil prices from falling too much in the coming year. Analysts at Goldman Sachs and Morgan Stanley forecast $110 for Brent crude — which should bode well for Chevron and other energy producers.

Here’s why Warren Buffett loves Chevron

Oil companies attracted the eye Berkshire Hathawayis Warren Buffett. This year, Berkshire bought over 127 million shares of Chevron, with the bulk of the purchases coming in the first quarter.

What’s not to love about it? Chevron has a sound business model and a healthy balance sheet, which has played a key role in increasing its dividend payout over the past 35 years.

The company’s staggering cash flow is another thing to love. This cash flow allows Chevron to increase its dividend, buy back $3.75 billion in stock in the third quarter alone, and pay down its debt. Its debt-to-equity ratio is one of the lowest in its peer group, and its balanced business has it well positioned, even if oil prices fall.

Chevron pays a 3.3% dividend and should have no problem maintaining and growing this earnings following the earnings windfall. There is evidence that oil prices could remain elevated in 2023 – making this Buffett stock an excellent source of passive income in this bear market.

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