Exxon Mobil Vs. Chevron Corporation - A Tight Contest

May.22.12 | About: Chevron Corporation (CVX)

Exxon Mobil (NYSE:XOM) and Chevron Corporation (NYSE:CVX) are two of the most followed dividend growth stocks. This exercise compares the dividend growth potential for both the stocks over a 10 year period, assuming an investor buys both at today's price level. ConocoPhillips (NYSE:COP) has been intentionally left out because of the split. One has to wait and see how the split works out.

Let us take a look at some of the basics about both company's dividends.

  • XOM's current yield works out to 2.8%. CVX's current yield is a much higher 3.7%
  • Both XOM and CVX have a payout ratio less than 30%, a very safe number
  • XOM's average dividend increase over the past 5 years has been 10%, while CVX's is almost 7%

As in earlier exercises, let us look at the power of dividend growth for an investor who can set aside his/her money for 10 years in both these companies.

Exxon Mobil:

  • Assume you purchase 1,000 shares at the recent price level of $82 for a total initial investment of $82,000.
  • The current yield works out to 2.8% as shown in the table below. Given the low payout ratio, there are quite a few unhappy Exxon investors who believe the dividends aren't high enough
  • The table uses an annual 8% increase in dividends for the calculation, even though XOM has averaged 10% over the past 5 years. The average has been significantly boosted due to the latest increase of 20%
  • Notice how the dividend payments and the yield on original cost more than doubles in 10 years, leading to about $5000 in annual dividends for 1000 shares.
  • We have left out the DRIP part from this piece as some investors choose to reinvest the dividends and some do not. Some DRIP during bad times to accumulate more shares and opt out of DRIP when the price per share seems to be at a fair value.
  • However, in case the price dips, turning on the DRIP will be helpful in maximizing the returns when things turn around.
  • Capital gains will certainly contribute to your overall gains. XOM has moved from about $70s in 2007 to its present trading level of $80s. It is not excessively high but oil and gas stocks do go through cycles.
  • Inflation has been ignored in this calculation as stocks are the best hedges against inflation when compared to other assets.
  • 10 years is a reasonable time period for this exercise as the market typically moves through many cyclical highs and lows in a decade.

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Chevron:

  • Assume you purchase 1,000 shares at the recent price level of $99 for a total of $99,000.
  • The current yield works out to a reasonable 3.7% as shown in the table below.
  • The table uses an annual 5% increase in dividends for the calculation, even though CVX's average has been 7% over the past 5 years.
  • Notice how the dividend payments and the yield on original cost goes higher by two and a half times in 10 years, leading to about $6000 in annual dividends for 1000 shares.
  • We have left out the DRIP part from this piece as some investors choose to reinvest the dividends and some do not. Some DRIP during bad times to accumulate more shares and opt out of DRIP when the price per share seems to be at a fair value.
  • However, in case the price dips, turning on the DRIP will be helpful in maximizing the returns when things turn around.
  • Capital gains have contributed much more to CVX investors than to XOM's. The stock price has gone from then $70s range to present level of $90s.
  • Inflation has been ignored in this calculation as stocks are the best hedges against inflation when compared to other assets.
  • 10 years is a reasonable time period for this exercise as the market typically moves through many cyclical highs and lows in a decade.

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(Click to enlarge)

Conclusion: In the previous exercise, Procter & Gamble (NYSE:PG) clearly edged out Johnson & Johnson (NYSE:JNJ). However, the battle between the oil giants seems much more closely contested. CVX's takes the first point home for higher yield but XOM almost evens it out by its slightly higher dividend growth rate. There is very little to separate these two stocks. However, we would pick Chevron for its better chances of capital appreciation and higher current yield if forced to pick just one. Also, one must remember that Exxon's recent dividend boost of 20% has not been the norm.

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