Warren Buffett is arguably the greatest investor that’s ever lived. He went from $0 to $100 billion. Purely through investing. In one lifetime. Mic drop.

Seriously, though, Buffett only makes moves and allocates capital when he sees an opportunity.

That’s how he’s built up one of the biggest fortunes of all time. And it looks like he’s found one such opportunity. We know this because Berkshire Hathaway’s 13F was just released.

The filing goes over all of the buys and sells committed within the $330 billion common stock portfolio managed by the legendary investor within his conglomerate, Berkshire Hathaway.

And this filing shows one dividend growth stock in particular that got loaded up on – again.

Today, I want to tell you about the dividend growth stock that Warren Buffett just bought $1.3 billion of. Ready? Let’s dig in.

Berkshire Hathaway added to their sizable stake in Chevron (CVX) in Q4 2021.

Chevron is a multinational energy corporation with a market cap of $263 billion.

Berkshire Hathaway’s 13F shows us that they purchased slightly over 9.5 million shares in the energy giant. That purchase is worth about $1.3 billion at today’s market pricing.

Warren Buffett and his team must love this stock.

Why do I say that? Well, they’re loading up on it – again. This buy actually follows up a purchase of more than 5.5 million shares in the prior quarter – Q3 2021. So that’s back-to-back quarters with large Chevron buys.

Berkshire Hathaway’s stake in Chevron is now valued at approximately $5.2 billion.

That’s right. We’re talking big money, which shows us how much Buffett must like Chevron here. They now own approximately 38.2 million Chevron shares. So Berkshire Hathaway has made a serious capital commitment to this idea. And why wouldn’t they?

There’s really not much to dislike about Chevron for dividend growth investors.

And don’t kid yourself. Buffett is a dividend growth investor in disguise. His affinity for high-quality dividend growth stocks is painfully obvious at this point, as most of his largest investments are precisely in the dividend growth investing space. In fact, I’ve rarely seen Buffett invest in a business that doesn’t pay a growing dividend.

Buffett knows how important a growing dividend is. 

A lengthy track record of a growing dividend shows us that a business has been managed consistently well for many years. After all, you can’t write checks that can’t be cashed. And you certainly can’t write ever-larger checks in that same fashion. It doesn’t work.

You have to produce the ever-more cash flow to sustain ever-larger dividends. And only great businesses, of course, can produce ever-more cash flow. It’s intuitive. Moreover, the expectation of a growing dividend forces management to be prudent with cash flow. It’s hard to waste any resources when hungry shareholders have to be fed with ever-larger piles of money.

On this front, Chevron is great.

Chevron has increased its dividend for 35 consecutive years. And the 10-year dividend growth rate is 5.6%. I know. Not massive. But that’s coming on top of the juicy 4.2% yield that the stock offers. So this is a great income play for yield-hungry investors. And since Chevron produced a record $21.1 billion in free cash flow last year and spent just $11.6 billion on dividends and repurchases, the dividend has plenty of room to head even higher.

There’s more than just yield here, though.

There’s also performance. The stock is up by a monstrous 47% over the last year. Plus, you get that fat dividend. Now, this is recent. The long-term picture is admittedly less rosy, but it hasn’t been all Chevron’s fault. The entire industry has repeatedly gotten beat up by politicians, environmentalists, and even institutional investors for years. In addition, at times, in the past, oil companies were their own worst enemies by funding too much exploration and flooding the market with supply.

But this is a new day, and it’s a new Chevron. A disciplined Chevron.

Chevron’s CEO Mike Wirth, who might just be the best CEO in the industry, has repeatedly stated that the company will focus capital on shareholder returns – read buybacks and dividends – as part of a new disciplined strategy that foregoes the constant spending and drilling of the past. Simply put, the company is hearing the message loud and clear from those who are pressuring it for a lower-carbon world.

So CapEx is coming down, which puts a lid on exploration. For perspective on just how far CapEx is coming down, Chevron’s CapEx was routinely in the $30 billion/year neighborhood for the first five years of this past decade. The company is guiding for annual CapEx to be between $14 billion and $16 billion through 2025.

This creates a virtuous circle.

By keeping a lid on exploration, this limits supply. And what do we know about supply and demand? Unless demand drops in tandem, less supply will raise prices. And that’s kind of what’s happened, except demand has actually been increasing of late. This has caused the price of oil to spike – we’re coming up on $100/barrel at this point.

The drop in exploration – something that’s been basically forced upon the industry by the powers that be – reduces costs, increases profitability, and allows for more capital to be sent back to shareholders. It’s basically a goldilocks scenario for investors, but less so for consumers. Buffett is undoubtedly aware of this.

There’s also the valuation.

Warren Buffett is renowned for his investing acumen, especially as it relates to valuation. He very rarely overpays for a business. And I don’t think he’s getting a bad deal here, either. Shares are trading hands for a P/CF ratio of 9.0. That’s actually lower than the stock’s own five-year average P/CF ratio of 10.5. And this disconnect comes despite the fact that Chevron is arguably in a better position today than it’s ever been, with healthy oil pricing and disciplined industry dynamics.

The record free cash flow is evidence of that positioning. The Chevron of 2022 should probably be awarded a higher cash flow multiple than it’s traditionally received, but they’re getting a lower one.

Again, what’s not to like? 

Chevron shares offer a yield that absolutely smashes what the market offers. It’s a Dividend Aristocrat with 35 consecutive years of dividend increases The growth is solid. And they’re more worried about gushing cash than gushing oil, which creates a very favorable pricing environment.

The stock has recently come to life after a long sleep. And the valuation isn’t at all unreasonable. If anything, the stock still looks undervalued – even after a huge run. And the company stands to lose negative press after engaging in lower carbon intensity. Now, Buffett doesn’t buy stocks because he thinks they’ll go up tomorrow.

He invests in businesses because he thinks they’ll do well over the long term. So keep that in mind here. If you’re in it for the long term, and if your portfolio could use more exposure to oil & gas, this could be your opportunity to invest alongside Warren Buffett and scoop up shares in a 4.2%-yielding Dividend Aristocrat.

— Jason Fieber

P.S. If you’d like access to my entire six-figure dividend growth stock portfolio, as well as stock trades I make with my own money, I’ve made all of that available exclusively through Patreon.

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