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Summary

  • Chevron is expecting 20% production growth by 2017.
  • The company has a P/E ratio of only 12.39.
  • Chevron's Australia operations will add to the company's growth.
  • The company has a low payout ratio and dividend yield north of 3%.
  • Chevron compares favorably to other stocks with a long history of dividends.

Chevron (NYSE:CVX) is the 3rd largest major integrated oil and gas company behind only Exxon (NYSE:XOM) and Royal Dutch Shell (NYSE:RDS.A). Chevron was originally founded 135 years ago as Pacific Coast Oil Co. Through its long history, the current Chevron company has gone by several names: Pacific Coast Oil, Standard Oil, and Chevron.

Chevron has a long history of growth, but is it a timely investment? This article will analyze Chevron's current events, future growth potential, and expected shareholder return. Further, we will compare Chevron to other businesses with 25+ years of dividend payments without a reduction using the 8 Rules of Dividend Investing.

Current Events

Chevron divides its operations into 2 main divisions: upstream and downstream. The upstream division generated about 7x as much profit as the downstream division for the first quarter of 2014. The upstream division earned $4,307 million versus $710 million for the downstream division.

First quarter earnings were down for Chevron as both upstream and downstream earnings decreased as compared to the first quarter of 2013.


Source: 2014 Q1 Presentation

First quarter earnings were down "primarily due to the lower prices and volumes for crude oil" according to the company's CEO John Watson. Current earnings weakness is unlikely to persist as Chevron has a bright growth plan ahead.
Source: 2014 Q1 Press Release

Gorgon Project

The Gorgon Project is a joint venture between Chevron (~47%), Exxon (25%), Shell (25%), & several smaller oil & gas companies (~3% together). The project is based off the northwest coast of Western Australia. When completed, the project is expected to have annual production of 15.6 million tons of LNG. Chevron expects the Gorgon project to be operational in mid 2015.

(click to enlarge)
Source: Chevron Australia - Gorgon Project

Wheatstone Expansion

The Wheatstone project is a joint venture between Chevron (~64%), Kuwait Foreign Petroleum Expansion (~13%), & Apache Corp (Ticker: APA, 13% ownership), and others (~10%). The project was started in 2011, and has a current capacity of 8.9 million tons of LNG per year. Of these 8.9 million tons of LNG, 8.1 have been sold to various businesses under long-term contracts.

Chevron has approved an expansion of Wheatstone, which will add about 16 million tons of additional LNG production per year. The expansion is expected to be completed in 2016. The Wheatstone project is located in Northwest Australia.

(click to enlarge)
Source: Chevron Australia - Wheatstone Project

Together, Chevron is expecting a 20% increase in production by 2017 from its new projects. This increase will come from its 2 Australian LNG projects mentioned above, as well as from several deep water projects. Chevron has invested heavily in its future; it is very likely the company will continue to grow as long as the world demands energy in the form of oil and gas.

Shareholder Return

Shareholders of Chevron can expect solid returns going forward. Investors should receive a CAGR of 8% to 12% from dividends (3%), share repurchases (~2%), and organic growth (3% to 7%).

Valuation

Chevron appears to be fairly valued or somewhat undervalued relative to its peers based on P/E ratio.

Ticker

Company

Market Cap

P/E

CVX

Chevron Corporation

242259.78

12.39

XOM

Exxon Mobil Corporation

440818.11

13.89

RDS.B

Royal Dutch Shell plc

266704

20.89

PTR

PetroChina Co. Ltd.

223862.7

11.01

TOT

Total SA

170112.29

12.92

BP

BP plc

159204.38

16.05

STO

Statoil ASA

101203.18

10.56

Source: Finviz

Chevron also trades well below the S&P 500's P/E ratio of 19.3, making its valuation very attractive relative to the overall market.

Consecutive Years of Dividend Increases

Chevron has increased its dividend payment for 26 consecutive years. Businesses with a long history of dividend payments are more likely to continue paying increasing dividends in the future.

Why it matters: The Dividend Aristocrats (stocks with 25-plus years of rising dividends) have outperformed the S&P 500 over the last 10 years by 2.88 percentage points per year.
Source: S&P 500 Dividend Aristocrats Factsheet, February 28 2014, page 2

Dividend Yield

Chevron has a dividend yield of 3.36%, ranking it at 23 out of 118 businesses with 25+ years of dividend payments without a decrease. Chevron's relatively high dividend yield is especially attractive in the historically low interest rate environment of today.

Why it Matters: Stocks with higher dividend yields have historically outperformed stocks with lower dividend yields. The highest-yielding quintile of stocks outperformed the lowest-yielding quintile by 1.76 percentage points per year from 1928 to 2013.
Source: Dividends: A Review of Historical Returns

Payout Ratio

Chevron has a payout ratio of only 38.60%. The company's low payout ratio ranks it at 46 out of 118 businesses with 25+ years of dividend payments without a reduction. Chevron's combination of high yield and low payout ratio is due to the company's low P/E ratio.

Why it Matters: High-yield, low-payout ratio stocks outperformed high-yield, high-payout ratio stocks by 8.2 percentage points per year from 1990 to 2006.
Source: High Yield, Low Payout by Barefoot, Patel, & Yao, page 3

Long-Term Growth Rate

Chevron's long-term revenue per share growth rate is lackluster. The company had higher revenue per share in 2011 than today. Chevron's long-term revenue per share growth rate is 3.58% per year, ranking it at 79 out of 118 businesses with 25+ years of dividend payments without a reduction. The company's future looks bright, and it is likely the company will grow more quickly over the next 10 years than the previous 10.

Why it Matters: Growing dividend stocks have outperformed stocks with unchanging dividends by 2.4 percentage points per year from 1972 to 2013.
Source: Rising Dividends Fund, Oppenheimer, page 4

Long-Term Volatility

Chevron's long-term standard deviation is 27.13%, ranking it at 53 out of 118 businesses with 25+ years of Dividend Increases.

Why it Matters: The S&P Low Volatility index outperformed the S&P 500 by 2 percentage points per year for the 20-year period ending September 30th, 2011.
Source: Low & Slow Could Win the Race, page 3

Conclusion

Chevron compares favorably to other businesses with a long history of dividend payments. The company is ranked at 30 out of 118 based on the 8 Rules of Dividend Investing. Chevron is well positioned for future growth with investments throughout the world. Further, Chevron operates in the oligopolistic oil industry which has historically seen the largest companies perform well.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

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