Chevron Corporation (CVX), through its subsidiaries, is engaged in
petroleum, chemicals, mining, power generation, and energy operations
worldwide. The company operates in two segments, Upstream and Downstream. This dividend champion has paid a
dividend since 1912 and increased it for 27 years in a row.
In April 2014, the Board of Directors approved a 7% increase in the quarterly dividend to
$1.07/share.
Chevron’s peers include Exxon Mobil (XOM), ConocoPhillips (COP) and British Petroleum (BP).
Over the past decade this dividend growth stock has delivered an annualized total return of 14.40% to its shareholders. Future returns will be dependent on growth in earnings and dividend yields obtained by shareholders.
The company has managed to deliver a 12%
average increase in annual EPS over the past decade. Chevron is expected to
earn $10.81 per share in 2014 and $11.37 per share in 2015. In comparison, the
company earned $11.09/share in 2013.
Chevron has a consistent history of share repurchases. The company has been able to reduce the number of shares outstanding from 2.197 billion in 2006 to 1.915 billion in 2014.
The company is also working towards increasing production from 2.6 million barrels of oil equivalent per day (MMBOED) to 3.1 MMBOED by 2017. The company actually decreased this projection from 3.3 MMBOED originally expected at a price of $79/barrel. However, it also increased the expected price to $110/barrel.
Chevron is strategic about its exploration and production, and focuses on areas where it has above-average odds of achieving financial success. As a result, Chevron is able to earn more per barrel than Exxon Mobil, BP or Total (NYSE:TOT). In the past decade, Chevron has also managed to achieve a reserve replacement rate exceeding 100%, which means that it has added more oil and gas resources than it pumped out of the ground. The company believes that it already owns the assets that will enable it to generate growth in production for years into the future.
Oil companies need to continuously explore for production, since the amount of oil and gas pumped from wells decreases every year. Even with improvement in technology for oil and gas recovery, future exploration is important. This is why companies need to be very careful about their capital allocation strategy, since they want to generate the most profit at the least cost, avoid overruns and still manage to reward their shareholders with a dividend and share buybacks. Unfortunately, oil and gas companies are price takers, and are subject to wild swings in prices. However, for integrated companies like Chervon, they can add value across the chain and extract more in profits. Of course, the problem arises if oil prices decrease for extended periods of time, which would mean that many unconventional oil and gas wells will be uneconomical to operate, which could decrease supply and also reduce incentive for further development of drilling technology in hard to reach places like deep seas, for example.
However, I believe any drops in price will be temporary, since that would decrease supply and thereafter increase prices. In addition, the demand for energy is expected to increase through 2030 by approximately 2%/year. While renewables will likely capture a higher share in satisfying the world's energy needs in the future, they are intermittent sources and are more expensive relative to conventional energy sources. Therefore, I believe that while the percentage supplied by traditional oil and gas will be lower in 2030, the overall amount of consumption will be much higher. We have all heard how emerging markets need energy -- well, if they are truly to embrace capitalism and grow their middle classes in the future, then rest assured that demand for energy will increase.
The annual dividend payment has increased by 10.50% per
year over the past decade, which is lower than the growth in EPS. Future growth
in dividends will likely match rate of increase in earnings per share.
A 10% growth in distributions translates into the dividend payment doubling every seven years on average. If we check the dividend history, going as far back as 1984, we could see that Chevron has actually managed to double dividends every ten years on average.
In the past decade, the dividend payout ratio increased slightly from 25% in 2004 to 35% in 2014. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
The return on equity has decreased from 29.40% and 15% over the past decade. I generally like seeing a high return on equity, which is also relatively stable over time.
Currently, Chevron is attractively valued at 11.80 times forward earnings, and
has a dividend yield of 3.30%. Overall, I believe that oil companies like
Chevron have the quality of assets that generate strong cash flows, and quality
of a management team, coupled with a dedication to sharing the wealth with
shareholders through a commitment to dividend growth and share buybacks. While
dividend growth rates might fluctuate from year to year, I am firmly believing
that the investor with a 20 year horizon, who patiently accumulates and
reinvests dividends, will reap the rewards in the future.
Full Disclosure: Long CVX, XOM and BP
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