Chevron: Currently Cheap and a Possible Winner In an Economic Turnaround

Every investor, except pure technicians, must operate from some basic belief about the shape of things to come. In this regard, I believe that the US and world economies will gradually find their footing in 2009 and will regain their long-term growth trends.

The world's economies have made it through bubbles before, and we will do so again. As I have said before, I cannot offer chapter and verse on how it will happen, but I remain convinced it will happen.

In light of this, for some weeks now, I have been thinking more and more about the other side of this valley. Who wins? What does it look like? How long does it take? I don't have many answers yet, but I do have one: When the world economy emerges from current recession, the energy crisis will be standing there waiting on us. For this reason, and because the big international oil stocks are very cheap, we have begun to nibble on selected oil stocks. Chevron is our first pick.

We like Chevron (CVX) because of its strong double-digit dividend growth over the last 5 years, and their success in finding new oil reserves.

The chart above shows our Dividend Valuation Model for CVX over the last 20 years. The stripped bar at the far right of the chart suggests that the fair value for CVX over the next 12 months may be near $100 per share. That would be a nice gain from its present value of $74.

In my mind, the only thing we need for CVX to reach that figure is if we see a bottom in the economy in the first half of 2009. That may seem overly optimistic, but since I said at the beginning that I believe a bottom will come in 2009, it does not require much convincing for me to think that we might see CVX at $100 per share over the next 12 months.

The chart at the right compares the yield on a 10-year US Treasury bond versus the dividend yield of CVX. In recent days, the dividend yield (shown in red) has pushed above the yield on a T-bond (blue line). This intersection is saying that the market now believes that CVX is over valued and is likely to cut its dividend to return to a more normal spread versus the T-Bond. I just don't agree with the market's logic here at all.

I believe the only way that that could happen is if the Obama Administration trashes the oil industry. That is not a good bet, especially in the next two-three years.

Disclosure: The author, clients, and employees of Donaldson Capital Management own CVX.

This blog is for information purposes only. Do not make buy and sell decisions based on this information. Please consult your own financial advisor regarding any issue discussed here.

Comments

[13958:]

Nicely written up. I also believe CVX and the US economy should start a slow growth process in late 2009.........CVX should be a winner for those who are patient.

I can't believe all those investors throwing money at TIPS, and other Treasury investments at 0%, when you can own aprime company such as CVX, and while you wait they pay out a nice dividend!

Thanks for the article!

2008 Dec 31 08:28 AM

[JET1C:]

"This intersection is saying that the market now believes that CVX is over valued and is likely to cut its dividend to return to a more normal spread versus the T-Bond."

This is not what is met by the intersection of these two lines. It only indicates the extreme measures that the treasury has taken to add liquidity to the economy. I don't disagree on the thrust of the article. I too am a dividend investor and an energy investor. I'm hopful that the ecomony will turn around in '09 and I believe that energy (oil, coal, nat gas and clean) will lead the way.

Best to all for the New Year.

2008 Dec 31 10:29 AM

[tipalia:]

Like they say on a lot of sites and on the screen buy CVX and forget about it . If you believe the economy will never ressucitate and the barrel of oil is going to 12$ don t even look at it other wise buy 50 shares at a time when you some money to invest .

2008 Dec 31 11:16 AM

[beenburnedt...:]

They really need crude at >$50 barrel soon and consistently in order to continue their solid dividends and price appreciation.

2008 Dec 31 12:34 PM

[AnnaKay:]

Wait...What about Chevron’s potential environmental liability of 27 billion dollars?! You’ve all probably heard about Chevron’s Ecuador trial. If not, here's a very good article about it: www.bloomberg.com/apps...

Looks like Chevron will have to pay up, and who do you think will be the biggest loser then?? Shareholders!

2008 Dec 31 02:44 PM

[fairguy:]

don't know why the author favoring chevron. There are lots of many major oil and gas companies that are also cheap and pays HIGHER dividend without the liability. I currently own one that pays 6.7% dividend at current share price. It reached as high as 7.2% last week. No, it isn't a trust, it is a major.

2008 Dec 31 05:34 PM

[Francesca d...:]

The Equador litigation is a cheap political frame-up. I do not think the whole background story has yet been told, in particular the sustained attacks on Chevron individual and corporate shareholders by organised crime cartels posing as bona fide democracies.

UN Security Council papers are brimming with examples of this long term harrassment.


On Dec 31 02:44 PM AnnaKay wrote:

> Wait...What about Chevron’s potential environmental liability of
> 27 billion dollars?! You’ve all probably heard about Chevron’s Ecuador
> trial. If not, here's a very good article about it: www.bloomberg.com/apps...;refer=&sid=ay...
>
>
> Looks like Chevron will have to pay up, and who do you think will
> be the biggest loser then?? Shareholders!

2008 Dec 31 06:36 PM