By Ishtiaq Ahmed
Chevron Corp (CVX) is one of the best dividend payers in the energy sector. The company pays extremely attractive dividends of $3.60 on an annual basis and has a long history of dividends. In addition, Chevron has been increasing dividend on a consistent basis. In order to maintain its dividends, it is very important for a company to have a manageable payout ratio. At 25%, Chevron has near ideal payout ratio. Based on the closing price on November 9, the stock offers dividend yield of 3.40%.
Dividend paying stocks are particularly attractive due to the poor rates offered by the debt market. However, it is important to pick stocks which can maintain dividends in the long term. In my previous article, I analyzed the earnings, debt and cash flows of the company. In this article, I have performed a deep free cash flow and debt analysis with the help of some essential metrics.
Free Cash Flows:
Free Cash Flows | ||||
TTM | 2011 | 2010 | 2009 | |
Net Income | $24,568 | $26,895 | $19,024 | $10,483 |
Depreciation and other noncash charges | $12,589 | $12,911 | $13,063 | $12,110 |
Funds from Operations (FFO) | $37,157 | $39,806 | $32,087 | $22,593 |
change in noncash current assets | $2,546 | $768 | $652 | $1,856 |
change in noncash current liabilities | $2,156 | $498 | $126 | $1,352 |
Operating Cash flows | $32,455 | $41,072 | $31,561 | $19,385 |
Capital Expenditures | $24,560 | $26,500 | $19,612 | $19,843 |
Free Operating Cash Flow | $7,895 | $14,572 | $11,949 | -$458 |
Long Term Debt | $12,336 | $10,152 | $11,476 | $9,829 |
Source: SEC filings
Over the past three years, Chevron demonstrated substantial increase in its net income. The same pattern is evident in funds from operations of the company, and the end of 2011 FFO stood at a stunning $39.8 billion. The cash flows from operations stood at significantly improved levels in 2011 as compared to 2009. Chevron invests heavily in the business, and in the previous three years, the amount of capital expenditures has remained between $19.5 and $26.5 billion. At the end of 2009, the firm spent just over $19 billion in capital expenditures; however, by the end of 2011, the capital expenditures for CVX had gone up to $26.50 billion.
The company generates healthy free cash flows. Although the capital expenditures have been increasing, the firm has been able to post impressive free cash flows. The first column in the table shows the performance of the company over the previous twelve months. Due to weak commodity prices and production issues, trailing twelve months net income and cash flows have come down. Trailing twelve month net income and cash flows from operations stand at $24.5 billion and $32.45 billion, respectively. Capital expenditures in the past twelve months were $24.5 billion. As a result, free cash flows for Chevron have come down to $7.89 billion.
Essential Ratios:
Essential Ratios | ||||
2012 | 2011 | 2010 | 2009 | |
Funds from Operations(FFO)/Total Debt | 3.01 | 3.92 | 2.80 | 2.30 |
FFO/Capital spending requirements | 1.51 | 1.50 | 1.64 | 1.14 |
Free Operating Cash Flow + interest expense/ Interest expense | 158.90 | 292.44 | 239.98 | -15.36 |
Debt Service coverage | 9.51 | 80.79 | 133.38 | 47.12 |
For my analysis, I have used four ratios. First ratio indicates that the debt of the company is adequately covered with the FFO. The ratio has shown an upward trend over the past three years. However, I believe the FFO to debt ratio will be around 3.0 for the current year. Nevertheless, the firm is generating enough cash flows to cover the long-term debt. The second metric indicates that one of the most important components of the firm is easily covered with the FFO of the company.
As I mentioned, capital expenditures are an integral cash outflow for Chevron, and the analysis shows that the firm is able to meet its capital spending requirements through its internally generated funds. Chevron has low debt levels compared to other energy giants. As a result, interest expense for the company is extremely low. Last two metrics in the table indicate that the firm is able to meet its interest and debt payments easily. The company reported long-term debt of just over $12 billion at the end of the third quarter.
Competition:
Chevron competitors are Exxon Mobil Corporation (XOM), Royal Dutch Shell PLC (RDS.A) and BP (BP).
CVX | XOM | RDS.A | BP | |
P/E | 8.70 | 9.20 | 8.1 | 7.40 |
P/B | 1.60 | 2.40 | 1.20 | 1.10 |
P/S | 0.90 | 0.80 | 0.40 | 0.30 |
EPS Growth | 4.80% | -0.90% | 5.30% | 6.40% |
Operating Margin | 18.40% | 16.00% | 10.50% | 7.20% |
Net Margin | 10.00% | 9.10% | 5.50% | 4.60% |
ROE TTM | 19.00% | 27.50% | 15.20% | 15.60% |
Debt to Equity | 0.10 | 0.10 | 0.20 | 0.40 |
Source: Morningstar.com
Chevron trades at a slight premium compared to BP and RDS.A. However, the company beats all of its competitors with strong margins. In addition, Chevron offers attractive ROE and low debt to equity than most of its competitors.
Summary:
Chevron has extremely impressive cash flows and dividends are adequately covered with free cash flows. At the moment, the company has a 25% payout ratio based on its earnings. Healthy free cash flows indicate that the firm should not have any trouble maintaining its current dividends. However, the biggest threat for Chevron comes from the Ecuadorian rainforest case. As I mentioned in my previous article, the company can face the prospect of paying $18.2 billion in damages. Chevron inherited the case when it acquired Texaco in 2001. Other than the lawsuit, Chevron has bright business prospects and the company should be able to maintain its dividends.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
