We recently compiled a list of the 8 Best Value Dividend Stocks to Invest in According to Warren Buffett. In this article, we are going to take a look at where Chevron Corporation (NYSE:CVX) stands against the other dividend stocks.
Many experienced economists and investors today take inspiration from Warren Buffett’s strategies. His focus on value investing played a key role in building his fortune. This investment philosophy involves purchasing undervalued stocks or businesses when market sentiment drives prices lower and holding them for the long term. Buffett has made some of his most successful investments by capitalizing on opportunities when others were selling out of fear.
Value investing remains one of the most widely used investment strategies, having generated substantial returns over time. A report from Bank of America highlighted its long-term success, showing that since 1926 through 2023, value stocks have delivered a total return of 1,344,600%, significantly outperforming growth stocks, which have returned 626,000% over the same period.
Also read: 8 Unstoppable Dividend Stocks to Invest in
Lowell Miller’s book, Single Best Investment, highlighted the insights of Fama and French on value investing, referencing their published works in the Journal of Finance. Here are some remarks by Nobel laureates:
“Firms that the market judges to have poor prospects, signaled by low stock prices and low price/book ratios, have higher expected stock returns . . . than firms with strong prospects.”
The book highlighted that when a growth stock does not live up to investors’ high expectations, they come to realize that its price was inflated, often resulting in a sharp decline. In contrast, value stocks, which generally have lower expectations, can exceed predictions, leading to a positive reassessment of their price. However, the book also stresses the importance of diversification, as relying too heavily on a single investment can be risky. Historically, maintaining a diversified portfolio has been a prudent approach for investors.
According to a report by BlackRock, value stocks can serve as a buffer in a shifting market environment. A recent example was the broad market downturn in 2022, where steep declines in growth stocks were somewhat balanced by smaller losses in value stocks. By definition, value stocks trade at lower prices compared to growth stocks, though the extent of this discount has varied over time.
An analysis of the broader market’s growth and value stocks suggests that valuations would need to climb by more than 40% to bring value stocks back to their long-term median levels. This indicates significant upside potential if value stocks begin to recover, particularly as high valuations in growth stocks may encourage investors to shift toward value as the market expands its focus beyond mega-cap companies. While past performance does not guarantee future results, history offers some perspective. The last time the valuation gap between the Russell Growth and Russell Value indexes was as wide as it is today—back in December 2000—value stocks went on to outperform growth stocks over the following one-, three-, and five-year periods, the BlackRock report further highlighted.
In addition to focusing on value stocks, Buffett allocates a significant portion of his investments to dividend-paying companies. By the end of the third quarter of 2024, the majority of companies in his portfolio not only distributed dividends to shareholders but also had a consistent history of maintaining and growing those payouts. In this article, we will take a look at some of the best value dividend stocks according to Warren Buffett.
Our Methodology:
For this article, we analyzed Berkshire Hathaway’s 13F portfolio as of the third quarter of 2024 and picked dividend stocks. From that list, we selected stocks that have forward price-to-earnings (P/E) ratios below 21 as of January 28. A low P/E ratio indicates that a stock or an investment is relatively undervalued in the market. The stocks are ranked in ascending order of their forward P/E ratios as of January 28. We also considered hedge fund sentiment around each stock using Insider Monkey’s data for Q3 2024.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
An aerial view of an oil rig at sea, the sun glinting off its structure.
Chevron Corporation (NYSE:CVX)
Forward P/E Ratio: 12.71
Chevron Corporation (NYSE:CVX) ranks fourth on our list of the best value stocks to buy according to Warren Buffett. The American multinational energy company manufactures and sells a range of high-quality refined products. The company is in a strong cash position, and its CEO recently outlined plans to boost free cash flow by $6 billion to $8 billion next year, alongside cost reductions amounting to several billion dollars. These improvements are expected to stem from new or expanded oil production projects in Kazakhstan, US shale areas, and the offshore Gulf of Mexico. In the most recent quarter, the company reported an operating cash flow of $9.7 billion, up from $6.3 billion during the same period last year. Moreover, it returned $7.7 billion to shareholders via dividends and share buybacks.
Chevron Corporation (NYSE:CVX) intends to stay profitable even with moderate oil prices, allowing it to fund capital projects and raise dividends. To achieve this, it plans to realize additional structural cost savings of $2 billion to $3 billion by 2026 while maintaining a focus on a low-cost, high-margin production portfolio. The stock has delivered a nearly 5% return to shareholders in the past year.
Chevron Corporation (NYSE:CVX) is one of the top choices of income investors as the company has raised its payouts for 37 years straight, even during tough industry downturns. This makes it a reliable option for investors new to the sector, seeking stable and foundational investments. Unlike many exploration and production (E&P) companies, which come with higher risks, it offers a steadier investment with consistent returns. The company’s quarterly dividend comes in at $1.63 per share and has a dividend yield of 4.17%, as of January 28.
At the end of Q3 2023, 63 hedge funds tracked by Insider Monkey owned stakes in Chevron Corporation (NYSE:CVX), compared with 64 in the previous quarter. These stakes have a consolidated value of over $21 billion.
Overall CVX ranks 4th on our list of the best value stocks according to Warren Buffett. While we acknowledge the potential for CVX as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than CVX but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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Disclosure: None. This article is originally published at Insider Monkey.