Key Points
Chevron's valuation looks attractive, especially in light of its growth prospects.
Buying the stock allows investors to begin receiving Chevron's juicy dividends sooner rather than later.
However, Chevron's stock could be available at an even more attractive price if oil prices decline further.
- 10 stocks we like better than Chevron ›
Chevron's (NYSE: CVX) sizzling momentum from earlier this year has unquestionably evaporated. Although oil prices remain elevated, the giant energy stock has plunged by nearly 20% from its late March peak. The precarious peace agreement negotiations between the U.S. and Israel have taken a toll on Chevron's share price.
Should you buy Chevron stock while it's below $180? Or should you wait for an even bigger dip? Here's a look at the cases for both sides of the argument.
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There's no time like the present
Perhaps the most compelling reason to buy Chevron stock right now is that its valuation is attractive compared to historical levels. The oil and gas company's average price-to-earnings ratio over the last 10 years was around 23. Chevron's shares currently trade at less than 11.5 times forward earnings.
This low valuation isn't due to underlying problems with Chevron's business. Chevron ranks as the world's third-largest energy company by market cap (and the second-largest in the U.S.) Its upstream business margins are the highest in the industry. Chevron is the leader in natural gas. The company commands a leading market share in the retail part of the energy sector. Its capital efficiency bests all of its top rivals.
Meanwhile, Chevron appears to be on track to deliver strong growth. The company's acquisition of Hess significantly boosted production capacity. Chevron recently signed a 20-year agreement with Microsoft (NASDAQ: MSFT) to power a huge AI data center in West Texas. Management expects to grow earnings per share and adjusted free cash flow by an average of at least 10% per year.
Wall Street remains bullish about Chevron, too. The consensus 12-month price target reflects a potential upside of around 30%.
Last, but not least, buying Chevron stock now will allow investors to begin receiving the oil major's juicy dividends sooner rather than later. Chevron's forward dividend yield tops 4.2%. The company has increased its dividend for an impressive 39 consecutive years.
Patience is a virtue
On the other hand, waiting for a more attractive buying price could be a smart move. Although Chevron's shares have fallen significantly over the past three months, the stock is still well above its average trading price over the last five years.
More importantly, oil prices could decline further. There's still a risk premium in play as negotiations between the U.S. and Iran continue. However, if a lasting peace agreement is reached, we could see oil prices fall sharply -- with Chevron's share price following suit.
One phrase you'll see frequently in analyses of Chevron's business, such as those by Morningstar (NASDAQ: MORN), is that the company has an "oil-leveraged portfolio." Heavy exposure to oil is great when oil prices are rising, but not-so-great when oil prices are falling.
What about the case for buying Chevron for its dividend? The counterargument is that if the stock declines further, holding off would allow you to lock in an even higher yield.
A balanced answer
Which makes more sense right now -- buying Chevron or holding off? I think the best answer is a balanced one.
Chevron is one of the most reliable dividend stocks on the market. If you're an income investor, buying shares sooner rather than later could be your smartest move. However, if you have ample cash to deploy, investing some now and some later could still be wise. There's a good chance that you could get a better deal on this top-tier energy stock.
The same logic is applicable if you're not primarily seeking income and have a long-term investment horizon. No one knows for sure whether Chevron (or any other stock, for that matter) will rise or fall over the near term. Investing some now, while continuing to buy more shares later, is a good approach in light of the uncertainty.
Should you buy stock in Chevron right now?
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Keith Speights has positions in Chevron and Microsoft. The Motley Fool has positions in and recommends Chevron and Microsoft. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
