Chevron Buybacks Might Not Matter At All (CVX, XOM, COP)

Chevron Corporation (NYSE: CVX) traded higher in the after-hours session after the company gave an update to its buyback program.  The company said that it would begin purchasing common stock during the current quarter under its existing share buyback program.  It gave a figure of $500 million to $1 billion per quarter.  Unfortunately, this buyback rate might make no real difference to holders and the company might be better off allocating the cash in more traditional methods.

As far as what the company really said, this is part of a plan already approved and already authorized.  Management noted that its primary goal was to deploy cash to create shareholder value.  The focus is said to be on sustaining and growing the dividend (currently about 3.5% yield), funding its leading project queue, maintaining a strong balance sheet, and share repurchases.  The company highlighted capital discipline and strong cash flows.

Here is where the problem lies.  Let’s just say that Chevron maximizes its spending at $1 billion per quarter.  The company has a market cap of roughly $163 billion.  At that rate, Chevron could virtually take itself private… in almost 41 years.

Chevron has roughly 2 billion shares outstanding.  Even if the company uses “only” $500 million per quarter in buybacks, that could translate to $2 billion a year.  If you applied that rate to its dividend, then there would be an extra $1.00 per share that could be paid out in dividends.  How that will translate to in tax matters after 2010 is still up for grabs and still unknown.  Still, that’s $1.00 per share.  Imagine tacking on $1.00 straight into dividend payments.  The current rate is $0.72 per quarter or $2.88 per year, which is where the 3.54% yield comes from based on an $81.31 closing bell price.  Tack on $1.00 to the payout and a $3.88 annual dividend comes to a yield of more than 4.75% based on today’s share prices.

How would that compare to the sector?  Exxon Mobil Corp. (NYSE: XOM) yields roughly 2.8% today, while ConocoPhillips (NYSE: COP) yields similar to Chevron at 3.8%.  If Chevron passed up on the buybacks and added all of this into the dividend then it could be the highest dividend payer by far of the major integrated oil companies domiciled in the U.S.

As far as how it would compare in buybacks, the king of stock buybacks has been Exxon Mobil Corporation (NYSE: XOM). Exxon is twice the size of Chevron, so that can’t be too big of a shock that it leads in buybacks.

If Chevron spent $1 billion per quarter, that would come to about 12.3 million shares based upon the $81.31 price on a static basis.  The average daily volume is over 9 million shares, so this represents only about 1.35-days worth of trading volume per quarter.  Again, no slight but it is hard to expect major gains from this for shareholders.

Chevron’s 52-week trading range is $66.83 to $83.41.  Buying shares at highs usually does not translate to major returns for holders.  Earnings estimates from Thomson Reuters are $9.46 EPS for 2010 and $9.71 for 2011, but of course that figure will depend upon where gas prices head.  This leaves ample room for buybacks AND dividends, but the take here could be that the dividend is a better measurement of confidence and a better measurement of adding to shareholders’ total return through time.

The matter at hand is not that Chevron is doing something poorly nor that Chevron is hosing its shareholders.  It is not.  The argument here is that the buybacks just are not enough to make any major difference in the grand scheme  of things and that perhaps applying all of this cash to shareholders might be the best used for dividends.

There is also the argument that buybacks really do not build shareholder value unless they are massive.  Maybe the argument is in how “massive” is defined.  The good news for shareholders is that the after-hours session last night was a vote for the buyback action.  Shares closed down almost 0.8% at $81.31 and shares were trading closer to $82.00 in the after-hours session.

JON C. OGG