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Chevron (NYSE:CVX) is an integrated energy company and the second largest oil company in the United States, second to Exxon Mobil (NYSE:XOM).

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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:

YearDividendGrowth
2002$1.40*5.66%
2003$1.43*2.14%
2004$1.53*6.99%
2005$1.7514.38%
2006$2.0114.86%
2007$2.2612.44%
2008$2.5311.95%
2009$2.665.14%
2010$2.846.77%
2011$3.098.80%
2012$3.51**13.59%

* 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.

YearFree Cash Flow (Mil $)Float (Mil Shares)Payout Ratio
2002$2,3442,116126.38%
2003$6,6902,07644.37%
2004$8,3802,12238.74%
2005$11,4042,15633.08%
2006$10,5102,19742.02%
2007$8,2992,13158.03%
2008$9,9662,05052.04%
2009$-4702,001N/A
2010$11,7472,00748.36%
2011$14,5982,00542.36%

Historically, the payout ratio has been around 40%, with the exception of a few weak years like 2009.

Valuation

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.

Conclusion

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.

Source: Chevron Is A Great Dividend Stock