Company Description: Chevron Corporation is a global integrated oil company (formerly ChevronTexaco) that has interests in exploration, production, refining and marketing, and petrochemicals.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value, along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
CVX is trading at a discount to only 3.) above. The stock is trading at a 44.9% premium to its calculated fair value of $82.00. CVX did not earn any Stars in this section.
Dividend Analytical Data: In this section, there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt-To-Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
CVX earned two Stars in this section for 2.) and 3.) above. The stock earned a Star as a result of its most recent Debt-to-Total Capital being less than 45%. CVX earned a Star for having an acceptable score in at least two of the four Key Metrics measured. The company has paid a cash dividend to shareholders every year since 1912, and has increased its dividend payments for 27 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high-yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
The NPV MMA Diff. of $256 is below the $800 target I look for in a stock that has increased dividends as long as CVX has. The stock's current yield of 3.37% exceeds the 3.31% estimated 20-year average MMA rate.
Memberships and Peers: CVX is a member of the S&P 500, a Dividend Aristocrat, a member of the Broad Dividend Achievers™ Index and a Dividend Champion. The company's peer group includes: BP plc (NYSE:BP) with a 4.7% yield, Exxon Mobil Corporation (NYSE:XOM) with a 2.6% yield and ConocoPhillips (NYSE:COP) with a 3.9% yield.
Conclusion: CVX did not earn any Stars in the Fair Value section, earned two Stars in the Dividend Analytical Data section and did not earn any Stars in the Dividend Income vs. MMA section, for a total of two Stars. This quantitatively ranks CVX as a 2-Star Weak stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to decrease to $86.39 before CVX's NPV MMA Differential increased to the $800 minimum that I look for in a stock with 27 years of consecutive dividend increases. At that price, the stock would yield 4.6%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $800 NPV MMA Differential, the calculated rate is 5.8%. This dividend growth rate is higher than the 2.6% used in this analysis, thus providing no margin of safety. CVX has a risk rating of 1.50, which classifies it as a low-risk stock.
CVX has an impressive business model. Its oil and gas development project pipeline is among the best in the industry, with many large, multi-year projects. The company's Myanmar subsidiary was recently awarded exploration rights in Block A5 in the Rakhine basin, off the coast of Myanmar.
However, since it operates as an integrated producer, the company is susceptible to downside risk from weakness in the global economy. CVX is reducing its refining footprint and focusing on large, long-lived upstream projects with higher margins and growth potential. As with other large multinationals, the company is finding it increasingly difficult to add reserves. Much of the remaining easily accessible reserves are owned by governments and national oil companies. As a result, CVX is focusing more on deep-water exploration.
The company's free cash flow payout continues to to be unfavorable. This is primarily the result of increased capital expenditures (CapX). From 2008 to 2010, CapX averaged $19.7 billion. In 2011, it increased 35% to $26.5 billion, 2012 it was up an additional 17% to $30.9 billion and 2013 was up 25% to $38.0 billion. In addition, CVX had two years of negative free cash flow during the last ten years. The stock is trading at a premium to my $82.00 calculated fair value. Until I see improvement in the free cash flow payout, I will not significantly add to my position.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in CVX (2.8% of my Dividend Growth Portfolio). See a list of all my dividend growth holdings here.