2014 continues to throw down some bargains at income investors. The latest addition to this list is Chevron Corporation (CVX). Chevron reported less than stellar numbers this morning as Seeking Alpha has covered here. This has sent the stock down almost 5% as of this writing. So, the recipe for "income vultures" as one SA reader put it, is to pray (and prey) for a weak earnings report from the company they love and the 2014 market seems to take care of the rest. This was recently seen with Altria Group (MO) as well. Below are a few reasons we picked up Chevron Corporation this morning.
4 Year High Yield: Chevron is currently yielding about 3.60%. Chevron last yielded more than 3.5% back in August 2010. Yes, not even during the 2011 October mini-crisis was Chevron yielding this much. Needless to say, Chevron has continued increasing its annual dividends through thick and thin. As a comparison, Exxon Mobil (XOM) yields just 2.70%, in spite of its own recent share price depreciation.
Upcoming Dividend Increase: Chevron will soon go ex-dividend for its quarterly dividend of $1.00 per share. This will complete 4 consecutive quarterly dividend payments of $1.00 per share. That means only one thing for dividend growth investors. A new dividend is soon on its way, starting from the May 2014 payout. The table below shows the last 5 yearly increases and their percentages.
(Source: Yahoo Finance)
Extrapolation: But wait, where is the 4% that the article's title talked about ? As with Altria Group, given Chevron's dividend growth history, the May 2014 dividend increase is not a question of "if" or "when". It is a question of "how much". Using the 5 year average of 9% shown above, we get a new annual dividend of $4.36 per share. In other words, a quarterly dividend of $1.09 per share instead of the current $1.00 per share. That will push the yield on cost tantalizingly close to 4% based on the current share price of $111.30.
The table below assumes an annual dividend growth rate of 5% and the yield on cost zooms up to 6.40% for the patient investor.
Price Target: Chevron's mean price target according to about 15 analysts on Yahoo Finance stands at $135. That represents an upside of more than 20%. Exxon Mobil's price target is only about 8% away from the current price. While analyst estimates aren't fool proof and are usually subjected to ridicule, the numbers mentioned here suggests Chevron seems more undervalued than Exxon Mobil.
Diversification: This is more of a personal reason as our portfolio did not include a big oil name so far. Stocks included so far were tobacco, staples, utilities, pharma, and real estate names. A generic take away from this section is that you might want to expand your portfolio's diversification by not only adding to existing positions but also looking for bargains elsewhere during this pullback.
Conclusion: As written in the past 2 articles, 2014 seems to be getting ugly real quick. But this might be a blessing in disguise for investors looking to pick up bargains for the long term. Please do not get in all at once, as there seems to be a general weakness in the market and we might see more sell offs (meaning more bargains). This seems like a perfect set up to average in on good stocks you like. One can look at so called "weaknesses" in any earnings report but for companies like Chevron and Altria Group, in the long term these are likely to be short term glitches.
Chevron made a huge appeal to us for the reasons mentioned above and hence the trigger was pulled.