The last week oil prices declined. The tumble it has taken is spectacular as a fellow DGI (Dividenvet) wrote. Lots of great companies are on sale. So lets dive in this candy store. Before the market opens in New York I will make a quick analysis of some Oil stocks.
Lets take a look at a company that is paying dividend for 27 consecutive years in a row. An oil company that’s part of the 6 greatest independent (not state owned) companies. It is a USA based company.
This analysis is on Chevron Corporation (CVX).
Company (from google finance): Chevron Corporation (Chevron) is engage in fully integrated petroleum operations, chemicals operations, mining activities, power generation and energy services. Upstream operations consist primarily of exploring for, developing and producing crude oil and natural gas; processing, transportation and regasification associated with liquefied natural gas; transporting crude oil by international oil export pipelines; transporting, storage and marketing of natural gas, and a gas-to-liquids project. Downstream operations consist primarily of refining crude oil into petroleum products; transporting crude oil and refined products by pipeline, marine vessel, motor equipment and rail car, and manufacturing and marketing of commodity petrochemicals, plastics for industrial uses and fuel and lubricant additives.
Can I explain this to a 10-year old? What Does This Company Do?
CVX is a company that extracts oil from the earth and refines it, so it can be used as gasoline for our car (and all sorts of different oil products).
Dividend Aristocrat: CVX is paying Dividend for 27 years in a row! And is a Dividend Champion. Its number 102 on the CCC-list from David Fish! And is a 4 star stock on Morningstar.com. This looks like a fine and solid investment. That’s a Pass!
Dividend Yield > 2.5%: The dividend Yield of CVX is 3.9%. This is just below the industry average of 4.1%. But it is above the 5 years average (3.2%). The Yield is above the requirements of the Pollie-Code, and therefore it passed the second Pollie-code.
Dividend payout <70%: The dividend payout is roughly 41%. This is below the maximum ratio. This also means that they can keep those dividend increases coming for a long time. And that is what Pollie Loves! So also passed for this point.
DGR 1 year > 0%: The dividend growth rate for 1, 3, 5 and 10 years are 11.1, 11.2, 9.0 and 10.6. With a 3 years average over 11%, yes I get excited. DGR also passed the fourth Pollie-code.
P/E-ratio < 15: CVX has a current P/E ratio is 10. And is lower then their 5 years average (10.3). It is also below the industry average of 10.5%. If we look at the current ratio we can say that is below the requirement of the Pollie-Code. Therefore this is a pass on the Pollie-code.
EPS > 0: The EPS is 10.48. So CVX also passed the sixth Pollie-Code
ROE > 10%: Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. The current ROE is 13.4%. Another pass.
Market Cap. > 100M: No problem at this point. More than $ 227.777 Mil. Another pass.
Chowder Rule > 12: Named after “Seeking Alpha” member Chowder. This is a method of identifying candidates for purchase based on a combination of yield and (5-year) dividend growth rate. When the sum of these elements is above 12%, the company presents an attractive entry point (8% for utilities). When the figure is above 8%, an existing holding is still considered worthy of being retained. The current Chowder rule is 12.6. This is therefore a pass on the Pollie-code.
Stock price 52wk high-25%: The 52 wk. high and low are: 135.10 and 106.65. This means that CVX will be in my buying zone when the stock price is below 127.99 ((135.10-106.65)*0,75 + 106.65). At this moment CVX is trading for $108.87. Therefore it is a pass on the Pollie-Code.
Beta: I think it’s important to have low Beta stocks in my portfolio. This helps to have a stable income all the time, even when the market has a rapid decline. The Beta for CVX is 1.12. So I have to take in account that this stock is a little more volatile than the general market.
Gordon Growth Model: A model for determining the intrinsic value of a stock, based on a future series of dividends that grow at a constant rate. Given a dividend per share that is payable in one year, and the assumption that the dividend grows at a constant rate in perpetuity, the model solves for the present value of the infinite series of future dividends. On the Internet their 2 formulas can be found.
Stock Value (P) = D / (k-G) or Stock Value (P) = (D*(1+G))/ (k-G)
D = Expected dividend per share one year from now
k = Required rate of return for equity investor
G = Growth rate in dividends (in perpetuity)
When applied to GE with D = $4.28, G = 5%, and k = 10% (corporate bond rate 2% + inflation rate 2% + equity risk premium 6% (very solid company), the intrinsic value will be around $90. At this moment CVX is trading above its intrinsic value.
Conclusion: When I look at the analysis, CVX passed 10 out of 10 from the Pollie-code! Wow that’s great. If we take a look at Gordon Growth Model we can see that the stock is trading in the (slightly) overvalued zone. But CVX is trading near the zone of their 52 week low (actually near the 104 weeks low!). The tumble in the oil prices last week and hopefully this week gives a great buying opportunity.
And am I the only DGI who is buying oil stocks? You probably know the answer is No. A lot of fellow DGI bloggers are taking advantages of this dip in the market.
CVX is a great investment and a good company to have in your portfolio, with a nice dividend yield. Considering all the data CVX is a stock that is buyable. I certainly put CVX on my watch list for my Vrijheid Fonds.
What are you – the readers, thoughts on Chevron Corporation? Is it a buy, do you own it?
Please comment on my analysis and thanks for stopping by!