Chevron stock currently trades at $106.22 with a 52-week range of $86.68 - $112.28. Chevron recently announced an 11% increase in the quarterly dividend, raising it to $0.90 per quarter. This puts the current yield at 3.3%. Chevron has increased the annual dividend every year for the last 25 years. Below is the ten-year dividend history:
* Adjusted for stock split
** Dividend increase already announced
The dividend growth slowed down during the recession, but has since picked up the pace, increasing 13.59% this year. I'll calculate the payout ratio as a fraction of free cash flow. The results are shown below.
|Year||Free Cash Flow (Mil $)||Float (Mil Shares)||Payout Ratio|
Historically, the payout ratio has been around 40%, with the exception of a few weak years like 2009.
I will use the Dividend Discount Model to put an estimated value on the company. This model assumes that the value of a company is purely the sum of all future dividends discounted back today. This is a reasonable valuation method if you are a dividend investor. The discount rate should be your required rate of return, and I will use a discount rate of 8%, which is roughly the long-term growth rate of the market as a whole. I will assume that the dividend will grow by 9% for the next ten years and then by 3% perpetually after that. Using these parameters, I arrive at a fair value of $116 per share. The result is shown below in the Dividend Value Plot:
In the above plot, a stock with a yield and ten-year growth rate that falls on the Fair Value Line is fairly valued, a stock that falls below the line is overvalued, and a stock that falls above the line is undervalued. Chevron falls above the Fair Value Line and is therefore undervalued.
Chevron is trading below my fair value estimate of $116 by about 8.6%. Given this and the 25 consecutive years of dividend increases, Chevron looks like a great dividend stock for a dividend-focused investor.