Chevron (CVX) is an integrated energy company and the second largest oil company in the United States, second to Exxon Mobil (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:
| Year | Dividend | Growth |
|---|---|---|
| 2002 | $1.40* | 5.66% |
| 2003 | $1.43* | 2.14% |
| 2004 | $1.53* | 6.99% |
| 2005 | $1.75 | 14.38% |
| 2006 | $2.01 | 14.86% |
| 2007 | $2.26 | 12.44% |
| 2008 | $2.53 | 11.95% |
| 2009 | $2.66 | 5.14% |
| 2010 | $2.84 | 6.77% |
| 2011 | $3.09 | 8.80% |
| 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.
| Year | Free Cash Flow (Mil $) | Float (Mil Shares) | Payout Ratio |
|---|---|---|---|
| 2002 | $2,344 | 2,116 | 126.38% |
| 2003 | $6,690 | 2,076 | 44.37% |
| 2004 | $8,380 | 2,122 | 38.74% |
| 2005 | $11,404 | 2,156 | 33.08% |
| 2006 | $10,510 | 2,197 | 42.02% |
| 2007 | $8,299 | 2,131 | 58.03% |
| 2008 | $9,966 | 2,050 | 52.04% |
| 2009 | $-470 | 2,001 | N/A |
| 2010 | $11,747 | 2,007 | 48.36% |
| 2011 | $14,598 | 2,005 | 42.36% |
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.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
