Chevron (NYSE:CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. It operates in two segments, Upstream and Downstream. This dividend champion has paid dividends since 1912 and increased distributions on its common stock for 25 years in a row.
The company’s last dividend increase was in April 2012 when the Board of Directors approved an 11.10% increase to 90 cents per share. This was the second increase in one year. The company’s largest competitors include Exxon Mobil (NYSE:XOM), British Petroleum (NYSE:BP) and Royal Dutch Shell (NYSE:RDS.B).
Over the past decade this dividend growth stock has delivered an annualized total return of 15.10% to its shareholders.
The company has managed to an impressive increase in annual EPS growth since 2002. Earnings per share have risen from 54 cents per share in 2004 to $13.44 in 2011. Analysts expect Chevron to earn $12.71 per share in 2012 and $12.91 per share in 2013. In comparison Chevron earned $13.44 per share in 2011.
New field developments are expected to generate 1% annual production growth through 2014 and then 4%- 5% for the next four years. Most of the capital spending on exploration and production would go into the Australia LNG, Gulf of Mexico and deepwater projects. Higher oil prices would also result in high earnings per share. Natural gas prices overseas have been more competitive overseas, in comparison to the US, which is a positive. While oil is easier to transport, natural gas is not.
The company is working on acquiring and developing assets which would provide strong results in the future and also add to its reserves. Chevron is better positioned than peers, since it has a larger exposure to more lucrative oil fields, versus natural gas fields. Chevron’s recent acquisition of Atlas Energy is just one example of this strategy. The acquisition has provided Chevron with access to the Marcelus Shale. The company is also disposing of assets which generate lower margins. Chevron is working on disposing of its lower margin refining business.
On the negative side, there is a court ruling in Ecuador against Chevron for a potential $18 billion. The likelihood of CVX having to pay this entire amount however is pretty slim to none however. Another potential dispute could occur in Brazil, related to Frade Field leak there.
The return on equity has closely followed the rise and fall in oil and natural gas prices. It rose between 2002 and 2007, then dipped in 2009, before rebounding strongly. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
The annual dividend payment has increased by 9.20% per year over the past decade, which is lower than to the growth in EPS.
A 9% growth in distributions translates into the dividend payment doubling every eight years. If we look at historical data, going as far back as 1983 we see that Chevron Corporation has actually managed to double its dividend every ten years on average.
The dividend payout ratio has remained low for the majority of the past decade. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
Currently, Chevron is attractively valued at 8 times earnings, yields 3.30% and has an adequately covered dividend.
Full Disclosure: Long CVX, XOM and RDS.B