Seventy five billion dollars…
That’s how much Chevron Corp. (CVX) is setting aside to buy back shares of its own stock. And this, on top of raising the quarterly dividend CVX pays to shareholders.
The Biden Administration is livid.
For more than a year now, Biden has been imploring big oil companies to invest cash into projects that will boost production. But instead, these oil companies are returning cash to shareholders.
It’s hard to miss the irony in this situation…
During Biden’s presidential campaign, the president criticized the oil industry for drilling too much.
Now, the “evil oil companies” are in trouble for not drilling enough.
It’s a classic case of “damned if you do, damned if you don’t.”
But let’s take a step back and look at what’s actually going on with these share buybacks. Is this really an immoral decision? Or just part of the way free markets operate?
How Share Buybacks Work
Years ago, I started a business with a friend of mine.
We worked hard and built up a loyal customer base. Sales were growing and profits were rolling in.
But conflict arose between me and my business partner. We had different ideas of how to treat our customers and our employees.
When we couldn’t resolve our differences we agreed that my partner would buy me out. He would use profits to pay for my shares. And once I was paid, all future profits would belong to him.
That’s exactly how a share buyback works for large companies like Chevron.
Going forward, Chevron will spend a large portion of its cash flow on share buybacks. Once the shares are bought, they will be retired.
This means there will be fewer shares of CVX available to investors. And every remaining share will represent a bigger piece of the company.
Since each share will represent a larger piece of Chevron, each share will naturally become more valuable. So when you add it all up, Chevron’s buyback plan creates more value for the owners (or shareholders) of the company.
That’s exactly what a free-market corporation is supposed to do.
The owners (a.k.a. shareholders) have risked their own capital to invest in the company.
If the economy tanks, expenses rise, or competing technology causes profits to fall, it’s not the government’s job to bail out investors. They took a legitimate risk when buying into the company.
Similarly, if things go well and profits rise, it’s not the government’s job to tell Chevron what to do with those profits. The owners (again, shareholders) are entitled to the profits after taking the risk of an investment.
That’s how free markets work!
It’s About Incentives – Not Threats
If the Biden administration really wanted oil companies like Chevron to reinvest in new production, it would be smart to provide incentives to make this happen.
Offering favorable tax plans for companies that tap into new resources could help increase production.
Streamlining the permit process for new wells would also help with the Administration’s objectives.
Heck, even congratulating oil companies on recent profits and treating these firms as part of the solution would make a difference.
But for now, the political climate in Washington has vilified the oil industry. So executives have no incentive to increase production — knowing that future profits will also be criticized.
As a general rule, I try to avoid political discussions. That’s just not my area of expertise.
But when politics affect your investments and your family’s wealth, I have a hard time keeping silent.
The good news is that many energy stocks like CVX represent great values right now! And as companies like CVX return capital to shareholders, future returns should continue to be strong.
Over the next year, I expect oil prices to drift higher.
China’s reopening, a shift towards refilling the Strategic Petroleum Reserve, and rising energy demand here in the U.S. will help support the crude oil market.
And as long as the current administration remains hostile to oil drillers, these companies will (wisely) continue returning capital to shareholders.
I’m currently holding call options on fellow energy company ConocoPhillips (COP) as part of my Speculative Trading Program.
For more information on this real-money investment portfolio (including live trade alerts, a table of open positions, and all historic trade data), check out the program details here.
Despite Biden’s harsh criticism, I believe big oil companies like Chevron are doing the right thing.
Investors should be able to lock in great profits from this area of the market in 2023. So make sure you don’t miss out!
Here’s to growing and protecting your wealth,
Zach
