Chevron Is A Great Dividend Stock

Apr.28.12 | About: Chevron Corporation (CVX)

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

Click to enlargeClick to enlarge

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%
Click to enlarge

* 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%
Click to enlarge

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:

Click to enlarge

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.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.