As far as I can tell, Chevron (NYSE:CVX) is one of the few companies in America that is just good at getting it right. The company places a primary emphasis on growing earnings while maintaining a sound balance sheet, places a secondary emphasis on growing dividends at a prolific 10% or so annual clip, and places a tertiary emphasis on reducing the share count by committing to buy back $5 billion worth of shares per year.
Among all the mega-cap blue chips in the country, Chevron might have one of the safest dividends in terms of payout ratio coverage. At a current rate of $0.90 per quarter, Chevron is committed to paying out $3.60 per share annually to shareholders. And boy, does this company have the earnings to back it up. Chevron's dividend is backed up by an estimated $12.25 per share in earnings, and $18.95 per share in cash flow. Like its main competitor in the integrated energy field ExxonMobil (NYSE:XOM), Chevron's dividend payout relative to earnings is very well-supported. The dividend payout ratio in relation to earnings is 29.38%, and the dividend payout ratio in relation to cash flow is 18.99%.
This is particularly remarkable when you consider that Chevron has been raising its dividend every year since 1988. And the increases haven't been minimal. Over the past ten years, the dividend has increased by a rate of 8.5% annually. The dividend amount per share has tripled since 1998. When I write articles on Seeking Alpha that talk about planting dividend trees for the long-term, this is exactly what I'm talking about. Over the past five years, Chevron has been giving investors 10% annual dividend increases. And because the payout ratio is so low, the company is able to retain a significant amount of earnings to retire shares (which makes paying future dividends easier) and reinvest in the future growth of the business so that the future dividend increases and stock buybacks will be likely to occur.
Chevron is making big capital investments in Western Australia to contribute a meaningful addition to long-term growth. Chevron's Gorgon Project represents a $37 billion offshore investment in Western Australia that is expected to start delivering natural gas in 2014. As of 2012, Chevron holds the most natural gas rights in the entire country of Australia. This could bode well over the next decade for investors because Chevron usually ranks #1 or #2 among its peers in earnings efficiency when it comes to natural gas projects.
Chevron has an annual capital and exploratory budget of over $30 billion. In a world that seems increasingly focused on increasing profits by lowering costs, it is refreshing to see a company that has a strong commitment to growing top-line growth. Chevron's capital and exploratory budget has quintupled since 2003 (on a per share basis), and analysts are projecting 10% top-line growth annually over the next three to five years.
And lastly, Chevron has a strong buyback program that actually retires shares from the market. Since 2006, Chevron has reduced the share count from 2.44 billion to 1.97 billion shares at the end of 2012. Today's share count is 80% of what it was in 2006. Going forward, the CEO John Watson has committed the company to spending at least $5 billion annually on share repurchases.
My primary concern about Chevron is the longstanding lawsuit with the Ecuadorian government. Chevron's subsidiary Texaco stands accused of causing billions of dollars worth of damages by allegedly dumping toxic waste into the Ecuadorian Amazon in the 1960s, 1970s, and 1980s, and this longstanding litigation has been unpredictable so far and the legal hassle is expected to continue for many years into the future. As to what this may ultimately cost Chevron shareholders, your guess as to the final results of this legal headache is as good as mine. But it is certainly something that Chevron shareholders will have to keep an eye on going forward.
When I look at what I like in a long-term investment, Chevron seems to do it all. The company has $21 billion in cash on hand relative to $12 billion in debt. The company buys back and retires its own stock to the tune of $5 billion per year. The company is growing dividends by about 10% annually right now, and the payout ratio is still only 30% of last year's earnings. The company has a capital and exploratory budget of over $30 billion to help finance future growth. No investment is perfect, and dealing with commodities businesses can often portend volatile stock prices and earnings results, but Chevron sure does seem poised to reward dividend and total return investors alike over the coming decade and beyond.
Additional disclosure: I have an outstanding buy order for Chevron at $97.89. It is highly unlikely to reach that price within the next 72 hours.