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Why Chevron’s Dividend Matters

There are two companies in the Dow Jones Industrial Average that focus primarily on gas and oil. These are Chevron and Exxon Mobil, and they have really struggled thanks to the seemingly constant drop in oil prices. Chevron, despite all of these problems going on with the price of crude oil right now, has taken steps to protect their investors by maintaining high dividend rates.

Obviously, this is a good thing for long term investors because it guarantees a return on the investment made, but it also raises some questions. For one, with all of the major oil companies throughout the world struggling to stay solvent right now, why is Chevron taking this risk? Everywhere, companies are cutting back on expenses, and paying a dividend is a huge expense. They are currently paying a dividend rate of $1.07 per share. There are a total of 1.88 billion shares of the company right now, which equals a total spending of over $2.01 billion paid out in dividends. Even if this is done only once per year, that is a tremendous cost for the company. Yes, they want to maintain investor loyalty and not lose the funding that they have already secured this way, but they also have put themselves at risk of great losses as a result of this, if for some reason the oil industry as a whole were to take a turn for the worst.

Even worse, Chevron needed to borrow money to payout dividends in 2015. They had a total of more than $8 billion in dividend payments to make during that calendar year, and the debt that they had to take on in order to appease shareholders is a big strike against them, even if it does make sense given the state of the oil industry right now.

As a general rule, short term traders shouldn’t be concerned too much by dividends because dividends payments will almost never make their way to a trader. They should be aware of changes in dividend structures, though, as a big increase in a dividend can cut into a company’s profitability, causing stock prices to take a tumble.

Chevron hasn’t experienced the tumble that was predicted for them early after this decision was released, which is a big sign of investor confidence. Instead, the company’s stock price shot up by more than 6 percent Wednesday, to over $94 per share. Whether or not this was a smart long term move by Chevron remains to be seen, but right now, investors and traders alike are bullish on the company because of their decision, and the confidence that this exudes.

They have announced cuts in many other areas thanks to the fact that they are not going to touch their dividends. Production and exploration are the two areas that are likely to be impacted the most heavily, and they’ve already announced that spending has been cut by more than 30 percent. This will likely put a huge short term squeeze on Chevron, especially as they have many projects that are still moving forward in full swing, but the full impact of this has not yet been realized. So while the market is currently still bullish on Chevron, this is very likely to change in the near future. As you focus on Chevron for your binary options trades, keep this in mind. Paying attention to the price of oil is also smart. Analysts believe that once oil hits $50 per barrel, the company will once again be profitable. But right now, with crude standing at under $40 per barrel, this seems to be a very long way away.

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