Today I continue my series on the DOW 30 component stocks. Let’s take a first look at super oil major Chevron (CVX). Chevron has a decent dividend yield and excellent dividend growth. The stock is trading cheap at only 10.2 times average adjusted earnings. CVX’s balance sheet is good with the exception of the current and quick ratios. To see how I came to these conclusions read on.
Chevron (CVX)
Price: $96.58
Shares: 1.97 billion
Market capitalization: $190.52 billion
What does the company do: Chevron is an integrated energy company with exploration, production, and refining operations worldwide. With production of 2.67 million of barrels of oil equivalent a day (69% oil), Chevron is the second-largest oil company in the U.S. Refineries are located in the United States, South Africa, and Asia for total refining capacity of almost 2 million barrels of oil a day. Proven reserves at year-end 2011 stood at 11.2 billion barrels of oil equivalent (58% liquids).
Morningstar’s take: Like its fellow supermajor integrated peers, Chevron is finding it increasingly difficult to expand production and add reserves in a world with a shrinking investable resource base. Much of the remaining pools of cheap, easily accessible resources large enough to interest the larger players reside in the hands of governments and national oil companies. Resource-rich nations are bolstering their nationally owned or controlled energy companies in an attempt to capture more value for their own countries. While this trend can create an opportunity for firms that can offer oil and gas development expertise, it also forces them to greater lengths to acquire reserves. In Chevron's case, that means focusing on deep-water exploration.
Bonds: $4.7 billion
Times interest earned: approximately 537 times. Chevron earned $26.895 billion in 2011 and according to Morningstar.com they paid no interest in 2011. I don’t think that is right given the $4.7 billion in bonds outstanding. However, I do have some interest expense information from 2010. Chevron paid $50 million in interest expense in 2010. Their bonds are definitely not a threat to the dividend.
Preferred stock: none
DIVIDEND RECORD: I only have Chevron historical dividend data going back to the 4th quarter of 2001. CVX paid a $0.35 quarterly dividend in late 2001. They haven’t cut the dividend at all since then. In fact, they have grown the dividend through the financial crisis of 2008-2009 when others S&P500 companies cut their dividends. Today the dividend stands at $0.90 per quarter. That is 157% straight-line growth over 11 years or straight-line annual dividend growth of 14.3%. They can proclaim themselves as part of the excellent dividend growers club.
Dividend: $0.90 quarterly
Dividend yield: 3.7% ($3.60 annual dividend / $96.58 share price)
Dividend payout: 26% ($3.60 / $13.61 using 2011 EPS) –OR- 38% ($3.60 / $9.45 using average adjusted earning power)
EARNING POWER: $9.45 @ 1.97 billion shares
(earnings adjusted for changes in capitalization – typically share buybacks and/or additional shares created)
EPS | Net income | Shares | Adjusted EPS | |
2005 | $6.54 | $14,099 M | 2,156 M | $7.16 |
2006 | $7.80 | $17,138 M | 2,197 M | $8.70 |
2007 | $8.77 | $18,688 M | 2,132 M | $9.49 |
2008 | $11.67 | $23,931 M | 2,050 M | $12.15 |
2009 | $5.24 | $10,483 M | 2,001 M | $5.32 |
2010 | $9.48 | $19,024 M | 2,007 M | $9.66 |
2011 | $13.44 | $26,895 M | 2,001 M | $13.65 |
Seven year average adjusted earnings per share is $9.45
Consider contrarian buying below $75.60 (8 times average adjusted EPS)
Chevron (CVX) is currently trading at 10.2 times average adjusted EPS. This is stock is value priced.
Consider value buying below $113.40 (12 times average adjusted EPS)
Consider speculative selling above $189.00 (20 times average adjusted EPS)
BALANCE SHEET – Good balance sheet except for current and quick ratios.
Book value per share: $63.71 ($125.507 B equity / 1.97 B shares)
Price to book value ratio: 1.5 (under 1.0 is good) ($96.58 share price / $63.71 book value per share)
Tangible book value per share: $61.85 (equity - $4.641 B in goodwill)
Price to tangible book value: 1.57 (near 1.0 is good) ($96.58 / $61.35 tangible book value per share)
Current ratio: 1.61 latest quarter (over 2.0 is good) ($55.272 B current assets / $34.257 B current liabilities)
Quick ratio: 0.57 latest quarter (over 1.0 is good) ($19.768 B cash / $34.257 B current liabilities)
Debt to equity ratio: 0.07 (lower is better)
Percentage of total assets in plant, property, and equipment: 58.08% (the higher the better)
Working capital trend: up huge!
CONCLUSION – Chevron will become a 6% high dividend stock if they continue the present dividend and their share price drops to $60.00 per share. Right now the stock has an above S&P 500 average yield of 3.7%. However, the coming worldwide recession will drop the price of oil and Chevron’s stock price. They’ve proven themselves to be dedicated dividend payers and growers during the 2008-2009 financial crisis. Chevron’s stock price bottomed in October 2008 at $57.83. That panic provided a rare contrarian buy opportunity at only 6.1 times average adjusted earnings . I think that you will get another opportunity to buy CVX near $60.00 per share again when Europe, Asia, and the US all reenter recession territory due to failed Keynesian economic policies. Chevron has a good balance sheet. Their current ratio and quick ratio are not satisfactory for me. I looked at their current ratio over the past 10 years and they are improving toward 2.0.
DISCLOSURE – I don’t own Chevron (CVX).
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