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Sunday, January 13, 2013

Recent Buy: CVX

Jan 8, 2013: Bought 25 shares of CVX at $109.68 per share.

My first purchase for DivGro is Chevron Corporation (CVX), a multinational energy corporation with headquarters in San Ramon, California. Founded in 1984, Chevron is involved in all aspects of the oil and gas industries, including exploration and production; refining, marketing and transport; chemicals manufacturing and sales; and power generation. Chevron is ranked as the third largest American corporation in the Fortune 500, after only Exxon Mobil and Wal-Mart Stores.

Chevron is a Dividend Champion, with a track record of 25 consecutive years of dividend increases. It currently pays quarterly dividends of $0.90 per share. Dividends payed out in 2012 increased by 13.6% over dividend payments in 2011.

Fair value estimates for CVX vary from $112.30 (S&P Capital IQ) to $125.00 (MorningStar) to $136.58 (Graham Number method). If we use the median value as fair value estimate, the current price of $111.73 is discounted by more than 5%, as required by my stock selection criteria.

The following table provides some key statistics for CVX. Highlighted values relate directly to my stock selection criteria and are presented without further comment.
I use a simplified version of the Chowder Dividend Rule as one of my selection criteria. In essence, you add the dividend yield and the 5-yr dividend growth rate together and, as long as the sum is greater that 12%, the stock should present a good entry point. For CVX, the sum is 12.42%.

For this analysis, I used the EPS Payout Ratio to verify that the dividend payout ratio is below 65%. For CVX, the EPS Payout Ratio is 3.60/12.19 = 29.53%.

For CVX, the Debt to Equity Ratio is 9%, well below my 50% limit.

I like to use a weighted average dividend growth rate calculation to favor recent dividend increases. Without real justification, I assign a weight of 7 to the most recent dividend increase and decrease this weight in whole numbers for dividend increases going back in time. Thus, the dividend increase 7 years ago gets a weight of only 1. For CVX, this results in a weighted dividend growth rate averaging 9.93% over the last 7 years.

The payback period of an investment is the length of time required to recover the original cost. For dividend paying stocks, we can consider the dividends received per share as payback of the original cost, namely the per share price. I require a 5-yr total payback percentage of at least 16%. Since this criterium is based on forward-looking data, I use a conservative approach. Assuming no further dividend increases, the 5-yr total payback percentage equals (500*3.6)/111.73 = 16.11%. So, any dividend increases in the next 5 years would accelerate payback. If CVX would maintain a 9.93% dividend growth rate in the next 5 years, the 5-yr total payback percentage would increase to 19.64%.

CVX passes all my selection criteria and earns 7 stars: (*******)

Other ratings for CVX:

S&P Capital IQ's Stock Report: (*****)Strong Buy
  • S&P Capital IQ measures the quality of a stock by analyzing the long-term growth and stability of a company's earnings and dividends over the most recent 10-yr period. It assigns a STARS ranking to each stock based on the forecast of a stock's future total return potential when compared to the expected total return potential of a relevant benchmark, such as the S&P 500 Index. Additionally, S&P Capital IQ also assigns a five-level stock recommendation. 
  • As a Scottrade customer, I can access this stock report.
Thomson Reuters StockReport+ (10/10)
  • In its StockReport+ product, Thomson Reuters performs a quantitative analysis of six investment decision tools: Earnings, Fundamental, Relative Valuation, Risk, Price Momentum, and Insider Trading. A simple average of the underlying component ratings is used to rank stocks on a 1-10 scale, with 10 being awarded to the highest scored. 
  • As a Scottrade customer, I can access this stock report.
MorningStar Rating: (*****)
  • This stock rating reflects MorningStar's opinion of the expected returns relative the stock's cost of equity. It is calculated by comparing a stock's current market price to MorningStar's estimate of the stocks fair value. Under the system, a 3-star stock should offer a fair return relative to the assumed risk of purchasing a stock. Five-star stocks should offer returns well above the cost of equity, whereas 1-star stocks should have significantly lower expected returns.
The Motley Fool's CAPS Stock Rating: (*****)
  • This stock rating system indicates a stock's potential to outperform the S&P 500, as determined by community sentiment. CAPS participants rate stocks by predicting if stocks will outperform or underperform the S&P 500 over a chosen time frame. Participants receive a rating based on the accuracy of their predictions, which the system uses to weigh their predictions. Over time, participants with higher ratings exert more influence over stock ratings. 

Final Remarks

Concerns for CVX (and its peers) are slipping oil prices. CVX's results are directly related to oil and gas prices, which are inherently volatile. As one of the largest integrated oil and gas corporations in the world, CVX is particularly susceptible to downside risk from continued weakness in the global economy. There are also questions about CVX's large capital expenditure plans for 2013, which could deteriorate its credit metrics.

CVX is in excellent financial health, with $21b in cash on hand. It pays a growing dividend, currently yielding an attractive 3.22%. CVX has targeted quarterly buybacks of its common stock since 2010, indicative of the company's commitment to creating shareholder value. Though the majority of CVX's earnings come from non-renewable energy sources like crude oil and natural gas, CVX has made strategic investments in the development of renewable energy sources.

This purchase adds $90 of expected dividend income to DivGro for the 2013 calendar year, an amount which should increase when CVX announces its next dividend increase.

Full Disclosure: Long CVX

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