Monday, October 6, 2014

CVX Stock Analysis -- Chevron Corporation

Chevron is a popular company among dividend investors.  Dividend Growth Investor did an excellent detailed analysis at seekingalpha. Here I try to organize my thoughts on this company and calculate my entry point.

Financial fundamental

The overall finance of CVX is sound and safe.  Please see above chart and see MU remarks for my comments.  One highlight is about free cash flow per share.  In 2009 and 2013, the figures were negative.  For the years with positive data, the amounts of free cash flow were all higher than dividend payout in the same year.  However, I am afraid the negative years would eat out cash preserve and force the company to raise bond to cater to dividend payout.

Dividend history growth

I reviewed Chevron's dividend payment history.  From 1970 onwards, in 38 years, there was one dividend cut in 1973.  there were four years without dividend year-over-year increase (1971, 1975, 1986, and 1987.)  From this history, I deduct that in the near future, dividend cut is an event with very low possibility. There might be one or two years without dividend growth.  However, since I have confidence in the prospect of oil industry, I won't worry too much when this actually happen.  Instead, I'll regard it as an opportunity to purchase more.

CVX dividend history and growth rate
CVX current dividend is $4.28, with annual yield at 3.6%.  The most recent 5-year average annual growth rate is 9.08%, and the 10-year rate is 10.60%, while the overall average rate covering the whole 37 years is 9.71%.  Let's take 9.08% as the conservative long-term growth rate,  according to below 10 by 10 table, it will take around 12.5 years to achieve 10% annual profit return rate.  My goal is to purchase those stocks that are able to achieve 10% yearly return rate within 15 years.  So CVX fulfill this criteria generously.

The most recent dividend growth was in April, 2014. Quarterly dividend has a 7% increase to $1.07/share.

Entry point

 Morning star valuates CVX at $132, while Yahoo 1-year target price is $135.76.  S&P intrinsic value is $124.70, and 1-year target price is $142.  My entry point based on forward PE and earnings forecast is at around $113.  When stock price falls at $113, I might initiate my position.  Considering the free cash flow risk, I'll seriously take action when the stock price falls under $110.

Disclosure:  No positions for now.  Will take action to purchase shares at $110.