Chevron Just Paid Down $8.4 Billion in Debt. Should You Invest $500 in the Stock Right Now?

Imagine being a contestant on Jeopardy! and Investing being one of the categories. Taking it a step further, one of the clues requires contestants to call out the three pillars of shareholder yield: buyback yield, dividend yield, and? Bueller?

The last one is where many market participants trip up. It's debt reduction. For many investors, reducing liabilities isn't as glamorous or as tangible as dividends or share repurchases, but it's important nonetheless. So it's commendable that Chevron (NYSE: CVX) trimmed its obligations by a record $8.4 billion during the second quarter.

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Sure, in the context of Chevron's $392.4 billion market cap, $8.4 billion doesn't sound like much. But as a famous senator once said, "A billion here, a billion there, and pretty soon you're talking real money." More importantly, Chevron's debt-reducing efforts confirm the stock is worth evaluating, even by investors with small grubstakes.

Chevron debt reduction definitely matters

S&P rates Chevron AA-, which is at the higher end of the investment-grade range. As such, it's in the upper tier of oil stocks in terms of effective interest rates. Chevron's is 4.3%. A few rivals have lower effective interest rates. Plenty more have higher rates.

The point is that with the Federal Reserve providing little indication that it will cut interest rates this year, it's prudent for companies of all shapes and sizes to reduce debt. Last year, Chevron spent $1.2 billion on interest expenses alone. Erasing $8.4 billion from its debt tally implies that, by some estimates, the oil giant could save as much as $336 million annually in interest expenses.

Chevron's second-quarter liabilities-reducing efforts are important for another reason. It's a matter of keeping up with the Joneses. In this case, the Joneses are Chevron competitors ExxonMobil and Shell. These rivals pared obligations by more than $7 billion and $10.8 billion, respectively, during the June quarter.

The point is that in a sector-specific game of debt-cutting musical chairs, it's best not to be left standing up when the music stops. Chevron has a chair, and that's good news for investors.

Chevron is sending a message

Actually, the oil major is arguably sending several messages by shedding $8.4 billion in debt. That move cuts Chevron's net debt-to-cash flow from operations (CFFO) ratio to 0.6x from 1.3x in the first quarter, confirming that balance sheet health is a priority.

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Chevron's debt paring also occurred as the company spent $6.5 billion on buybacks and dividends, confirming its cash flow position is sturdy. The subsequent drop in interest expenses could be used to fortify the energy company's status as a buyback machine and as a blue chip dividend stock.

Timing is also relevant. Chevron shedding some of its obligations while it notched earnings per share (EPS) that more than quadrupled year over year may be a sign that management wanted to capitalize on high prices while the getting was good. After all, oil prices are notoriously cyclical, and that's exactly the type of prudence that makes this energy stock worth considering.

Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool has a disclosure policy.