Dividend Aristocrats In Focus Part 6: Chevron Corporation (CVX)

Chevron still has significant capacity to add billions in debt if need be. Additionally, the company’s cash flow from operations currently cover Chevron’s dividends. The company is also engaging in selling off assets to raise cash.  While this isn’t ideal, it also shows Chevron’s management is firmly committed to rewarding shareholders with dividends.

Valuation & Expected Total Return

Chevron stock trades for a price-to-earnings ratio of 39. By contrast, the S&P 500 trades for a price-to-earnings ratio of 25. However, Chevron’s valuation multiple is misleading, as the company has suffered depressed earnings from the drop in commodity prices.

Earnings should normalize once oil and gas prices recovery. Chevron stock trades for a price-to-earnings ratio of 7.6 based on its 2012 peak earnings-per-share. This implies the stock is undervalued if the company can meet its full earnings potential. Multiple expansion could drive significant future returns.

In addition, Chevron’s future returns will be augmented by its 4.2% dividend yield.

I expect Chevron to grow at around 5% a year over the long run. The company has performed significantly better over the last decade than 5% a year growth. If Chevron grows at 5% a year over the long run, investors should expect returns of 9.2% a year, before valuation multiple gains.

Final Thoughts

Exxon Mobil Corporation (NYSE:XOM) is the largest (and strongest) oil corporation in the United States. Chevron Corporation (NYSE:CVX) is in the same ‘tier’, however. Chevron and ExxonMobil are the only oil companies to also be Dividend Aristocrats. Together, these 2 companies make up 33% of the global ‘Super Major’ oil corporations.

Chevron operates in a cyclical industry and is suffering through a steep downturn. But the company is adept at cutting capital spending effectively, and it has also curtailed share repurchases.

This has helped the company continue paying dividends through the oil crash. If oil prices continue to recover, Chevron stock could deliver double-digit returns through earnings growth. its 4.2% dividend yield, and valuation multiple increases.

Like almost everything in finance, oil prices are mean reverting.  They will correct upward.  When they do, Chevron shareholders will likely do well. In the meantime, investors get ‘paid to wait’ with the company’s 4.2% dividend yield.

Note: This article is written by Bob Ciura and originally published at Sure Dividend.