Chevron (NYSE: CVX) recently made headlines by unveiling a massive $75 billion share repurchase program. That’s enough money to potentially repurchase up to 20% of its outstanding shares, given its current market cap. While that sounds impressive, a closer look at the company’s repurchase history leaves much to be desired.
Because of that, Chevron could learn a valuable lesson from Apple (NASDAQ: AAPL), which, like the oil giant, is a top holding of Warren Buffett‘s Berkshire Hathaway (NYSE: BRK.A)(NYSE: BRK.B). Apple is by far Berkshire’s largest position, at more than $132 billion, which is over 38% of Berkshire’s investment portfolio. Chevron ranks third, at over $30 billion, representing about 9% of its investment portfolio. Apple’s success in buying back its shares likely increases Berkshire’s confidence to hold such a large stake in the tech giant.
A buyback machine
Apple generates mountains of cash each year. In 2022, it produced an astounding $122.2 billion of operating cash flow, $18 billion more than the prior year.
The company returns the lion’s share of this money to investors. It used $89.4 billion of its cash flow to repurchase shares in 2022, about $3.4 billion more than it repurchased the prior year. Apple also paid over $14.8 billion of dividends.
Apple’s repurchases have taken a big bite out of its outstanding shares over the years:
One reason Apple has made such a meaningful dent in its outstanding shares is that, unlike many tech companies, it doesn’t make large-scale acquisitions using its stock as currency. The biggest purchase in recent years was its 2014 acquisition of Beats for $3 billion, consisting of $2.6 billion of cash and $400 million of stock that vested over time.
By avoiding big acquisitions, Apple has sidestepped the associated dilution. This means its repurchases aren’t fighting an uphill battle from new issuances.
Not much to show for its repurchases
Chevron recently announced a monster $75 billion buyback that goes into effect in April with no expiration date. It will replace its existing $25 billion authorization.
That will extend the oil company’s long history of share repurchases:
As that slide showcases, Chevron has repurchased more than $65 billion of its stock over the last 19 years. The company noted that it made those repurchases at an average price of about $2 below the market average during that period.
But while that sounds impressive, Chevron’s repurchases haven’t put much of a dent in its outstanding shares over the years:
As that chart shows, Chevron’s outstanding shares are basically flat over those 19 years. One culprit is large-scale acquisitions paid for by issuing new shares.
For example, the company spent $18 billion in stock (75%) and cash (25%) to buy Unocal in 2005, $5 billion in stock to buy Noble Energy in 2020, and subsequently acquired the rest of Noble Midstream that it didn’t own in an all-stock deal. These deals added to its outstanding shares.
On a more positive note, the company’s acquisitions and other investments have helped fuel strong profit growth. Chevron delivered a record profit in 2022 at $36.5 billion, $10 billion more than its prior peak in 2011. Cash flow and free cash flow also set records at $49.6 billion and $37.6 billion, respectively. The company’s robust cash flows position it to continue buying back more stock in the future.
However, for those repurchases to reduce the company’s share count, Chevron needs to learn a lesson from Apple and avoid using its stock as deal currency. That was the strategy it followed last year when it bought Renewable Energy Group for $3.15 billion in an all-cash deal.
Meanwhile, it’s in a better position to continue following Apple’s playbook by making all-cash deals in the future thanks to its strong balance sheet. Its net leverage ratio was a low 3.3% at the end of 2022. That gives it the financial flexibility to continue repurchasing shares and investing throughout the oil cycle.
Chevron needs to get better at buying back its stock
Chevron grabbed the market’s attention by unveiling a massive buyback program. Unfortunately, the oil giant’s track record at repurchasing its shares is rather lackluster, as they haven’t offset the dilution from its acquisitions. Because of that, it needs to learn to follow the acquisition strategy of fellow top Buffett holding Apple by avoiding large-scale and dilutive deals so its buybacks can put a meaningful dent in its outstanding shares. That might give Buffett’s company the confidence to make Chevron an even larger part of its portfolio.
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Matthew DiLallo has positions in Apple and Berkshire Hathaway and has the following options: long March 2023 $120 calls on Apple and short March 2023 $130 calls on Apple. The Motley Fool has positions in and recommends Apple and Berkshire Hathaway. The Motley Fool recommends the following options: long January 2023 $200 calls on Berkshire Hathaway, long March 2023 $120 calls on Apple, short January 2023 $200 puts on Berkshire Hathaway, short January 2023 $265 calls on Berkshire Hathaway, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.