Chevron Corporation (CVX), BP plc (ADR) (BP): Adding Oil To The Ultimate Dividend Growth Portfolio

Page 1 of 2

Big oil companies are known for being reliable dividend stocks, but are they also good dividend growth stocks? So far my Ultimate Dividend Growth Portfolio is void of any energy companies, so today I’ll add two. I’ll also add a non-oil stock to the portfolio, and this will bring the total number of positions up to 17.

Chevron Corporation (NYSE:CVX) Chevron Corporation (NYSE:CVX)

Chevron is not the largest oil company, with a market capitalization of $230 billion which pales in comparison to Exxon Mobil Corporation (NYSE:XOM)’s nearly $400 billion. But Chevron offers a superior dividend, currently yielding 3.33% after an 11% increase starting with the payment going ex-div on May 15. Luckily, Chevron Corporation (NYSE:CVX) is being added to the portfolio just in time to receive this dividend payment.

Chevron’s dividend growth has been steady over the past decade, with an increase every year including during the financial crisis. The dividend has grown at an annualized rate of 10.5% since 2003 as the EPS has grown at a faster 16% annualized rate. If this kind of dividend growth continues into the future the 3.33% yield makes this stock an ideal dividend growth stock.

There is a little reason for concern, however. While the payout ratio with respect to net income is extremely low, about 26% in 2012, the dividend ate up 86% of the free cash flow. This was due largely to an increase in capital expenditures and a slight decline in the operating cash flow. Capital expenditures are expected to increase even further next year, rising to $36.7 billion from $30.9 billion in 2012.

For the last few years capital expenditures has been increasing at a much faster rate than the operating cash flow, and this could cause the company to slow the dividend growth. Presumably the investments being made haven’t fully paid off yet, so hopefully we’ll see increases in operating cash flows in the coming years. One positive point is that the company has $17.3 billion in cash and just $14 billion in debt, so there is plenty of cash to pay the dividend if the cash flow remains pressured.

I think it’s reasonable to believe that Chevron Corporation (NYSE:CVX) can raise the dividend roughly in line with past growth rates, plenty fast to justify inclusion in The Ultimate Dividend Growth Portfolio. Based on the current market price I’ll add 41 shares of Chevron to the portfolio with a total cost basis of $4,931.07. The projected annual dividend income from this position based on the upcoming $1 per share quarterly dividend is $164.

BP plc (ADR) (NYSE:BP)

BP is smaller than Chevron Corporation (NYSE:CVX), with a market capitalization of just $138 billion. After the Deepwater Horizon oil spill in 2010 BP plc (ADR) (NYSE:BP) slashed its dividend dramatically. The company went from paying $3.36 per share in 2009 to just $0.84 per share in 2010. Since then the dividend has regained some ground, with the 2012 payment totaling $1.98. Between 2003 and 2009 the dividend grew at an annualized rate of 14%.

The current dividend gives BP plc (ADR) (NYSE:BP) an astounding yield of 4.99%. Dividend growth doesn’t need to be all that fast to justify the investment with this high of a yield, so we have a bit of a buffer against slower future growth. BP plc (ADR) (NYSE:BP) has a problem similar to Chevron Corporation (NYSE:CVX), though: high capital expenditures. In 2012 capital expenditures actually exceeded the operating cash flow, which is concerning. The payout ratio in 2012 with respect to net income was 54% after a dramatic drop in net income from the year before.

The big selling point here is the yield. BP plc (ADR) (NYSE:BP) expects to increase its operating cash flow by 50% by 2014 along with spending between $24 and $27 billion on capital expenditures. This should bring the free cash flow into positive territory, but the company will still sport a high payout ratio with respect to that free cash flow.

Page 1 of 2
blog comments powered by Disqus
Insider Monkey Headlines
Insider Monkey Small Cap Strategy
Insider Monkey Small Cap Strategy

Insider Monkey beat the market by 52 percentage points in 24 months Click to see monthly returns in table format!

Lists

The 5 Biggest Kickstarter Scams That Swindled Backers’ Donations

The 10 Most Expensive Boarding Schools In the World

50 Crazy Facts About Japan You Won’t Believe

Top 10 Least Expensive Hybrid Cars to Save the Planet With

The 10 Biggest ‘Gate’ Controversies in History

The 10 States with the Highest Nursing Shortages Leaving Their Hospitals Depleted

The 10 Best Value Investment Blogs that Every Investor Must Read

The 6 Cheapest Boarding Schools in Europe 2015

The 5 Most Expensive Cars To Insure in the World

The 10 Most Common Genetically Modified Foods

10 Self-Made Billionaires Who Came From Nothing

The 10 Most Expensive Cities to Live in North America

The 13 Most Expensive Headphones in the World to Represent

The Top 20 Wealthiest Soccer Teams in 2014

4 BuzzWorthy Cannabis Stocks And Some Smoking Derivative Plays

The 10 Healthiest Fast Food Chains in America to Dine At

The 5 Most Expensive Cat Food Brands You Can Spoil Your Kitty With

The 6 Best eCommerce Platforms for Small Businesses

The 10 Worst Mistakes an Entrepreneur Can Make

The 5 Most OP Characters in League of Legends to Carry Games and Crush Foes With

The 5 Best Foods to Eat Before Running that Will Help You Pound the Pavement

10 Glaring Plot Holes in The Walking Dead that a Zombie-Filled Bus Could Drive Through

The 5 Biggest Celebrity Stoners Who Love Their Reefer

The 10 Most Overrated Movies Of All Time by Out-of-Touch Critics

Top 6 Least Expensive Cruise Destinations For 2015 that Will Take You to Paradise

10 States with Lowest Substance Abuse Rates in America

The 14 Most Watched TV Finales Ever

The 10 Best Selling Role Playing Games of All Time for PC

10 Most Influential Papers In Economics

Top 8 Biggest Charities in the US

10 Worst Celebrity Career Moves Ever

Top 10 Best Paid Tennis Stars in the World

10 Cities with High Demand for Nurses

6 of the Worst Greeting Card Messages Ever Crafted

How to Make Money in ArcheAge and Build Your Empire

10 Foods To Eat To Lower Cholesterol Levels

The 10 Most Hated Television Characters of All Time

The 30 Worst Halloween Costume Ideas Ever Brought to Horrible Life

10 Vocational Skills in Demand Today with Jobs Waiting to be Filled

10 Best Places to Visit in Central and South America

The 10 Greatest Empires in History Which Nearly Conquered the World

The 6 Cheapest Boarding Schools In America 2015

5 Clear Reasons LoL is Better than DotA, Continues to Rule MOBAs

The Only 9 Teams with a Chance to Win the Super Bowl

The 15 Most Common Phobias in America that Induce Fits of Panic

Top 6 Least Expensive Tourist Destinations in 2014

Jim Goetz, Peter Fenton, Jim Breyer: Top 6 Venture Investors for 2014

Top 15 Billionaires in 2014

5 Pitfalls To Avoid When Buying a Franchise

Top 20 Medical Schools in the US – 2014 Rankings

Subscribe

Enter your email:

Delivered by FeedBurner

X

Thanks! An email with instructions is sent to !

Your email already exists in our database. Click here to go to your subscriptions

Insider Monkey returned 47.6% in its first year! Wondering How?

Download a complete edition of our newsletter for free!