Warren Buffett continues to keep most of his powder dry. In the fourth quarter of 2023, he only bought three stocks, all of which were additions to existing Berkshire Hathaway positions.
When Buffett is reluctant to invest, it’s worth paying close attention to the stocks that he is willing to buy. One of his recent purchases, Chevron (CVX 0.94%), is a beaten-down high-yield dividend stock. Why is Buffett loading up on Chevron — and should you follow in his footsteps?
Buffett’s big bet on Big Oil
Chevron ranks as Buffett’s fifth-largest position, making up 5.1% of Berkshire’s overall portfolio. The legendary investor first initiated a position in the oil and gas giant in the fourth quarter of 2020. At the time, Chevron’s shares were down significantly with the lingering impact of the COVID-19 pandemic.
Buffett seemed to have adopted a less positive take on Chevron beginning in the fourth quarter of 2022, selling nearly 2.4 million shares. During the first three quarters of last year, he reduced Berkshire’s stake in the stock by close to 52.8 million shares.
However, the Oracle of Omaha is again making a big bet on Big Oil. He scooped up another 15.8 million shares of Chevron in Q4. Buffett also continued to aggressively buy shares of Occidental Petroleum, which is now Berkshire’s sixth-biggest holding.
What makes Chevron attractive?
Why is Buffett buying Chevron stock again? I suspect there are several key reasons.
Valuation stands at the top of the list, in my view. Chevron’s shares plunged in Q4 after the company announced plans to acquire Hess for $53 billion. As a result of this sell-off, though, the stock trades at a forward price-to-earnings ratio of only 11.6x.
Some investors are skeptical about the Hess deal. However, the negative reaction to the acquisition appears to be overdone. The consensus on Wall Street seems to reflect this: Of the 24 analysts surveyed by LSEG in February, 16 rate Chevron as a buy or strong buy.
We can’t read Buffett’s mind, but I’d bet that he thinks oil prices are headed higher in the not-too-distant future. Occidental CEO Vicki Hollub, an oil industry executive who Buffett greatly admires and respects, recently predicted that there will be an oil supply shortage by the end of 2025. It wouldn’t surprise me in the least if Buffett agrees with her.
Buffett also no doubt likes Chevron’s dividend. The company’s dividend yield currently tops 4.2%. Chevron has increased its dividend payout for 37 consecutive years. It won’t take much for the stock to deliver an attractive total return with such a juicy and growing dividend.
Should you buy Chevron stock, too?
Even Buffett himself would likely tell you not to buy a stock just because he did. Your investment objectives could differ from his and Berkshire Hathaway’s. That said, I think that two types of investors should find Chevron quite attractive right now.
First, value investors don’t have as many good alternatives in today’s market as they’ve had in the past. That’s a big reason why Buffett hasn’t been buying many stocks lately. Chevron, though, presents a good opportunity to invest in a well-run company at an attractive price.
Second, income investors have viewed Chevron as a top pick for years. The stock hasn’t lost its luster.
On the other hand, Chevron probably won’t appeal to growth investors. It isn’t likely to generate sizzling growth. There are better growth stocks on the market. However, most of them won’t be available at the discount that Chevron is and won’t offer the solid dividend that it does.
Keith Speights has positions in Berkshire Hathaway. The Motley Fool has positions in and recommends Berkshire Hathaway and Chevron. The Motley Fool recommends Occidental Petroleum. The Motley Fool has a disclosure policy.
