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Stock Analysis: Chevron Corporation

Chevron Corporation (CVX), through its subsidiaries, engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. It operates in two segments, Upstream and Downstream. Chevron is a component of the Dow Jones Industrials and the dividend achievers indexes. Chevron has paid uninterrupted dividends on its common stock since 1912 and increased payments to common shareholders every year for 17 years.

The most recent dividend increase was in April 2010, when the Board of Directors approved a 5.90% increase to 72 cents/share. The major competitors of Chevron include Exxon-Mobil (XOM), British Petroleum (BP) and Total (TOT).

Over the past decade this dividend growth stock has delivered an annualized total return of 13.10% to its loyal shareholders.

The company has managed to deliver an increase in EPS of 19.90% per year since 2001. Analysts expect Chevron to earn $12.19 per share in 2011 and $12.94 per share in 2012. This would be a nice increase from the $9.48/share the company earned in 2010. On average the company has managed to repurchase 0.76% of its stock annually over the past decade.

New field developments are expected to generate 1%-2% annual production growth over the next five years. Most of the capital spending on exploration and production would go into the Australia LNG, Gulf of Mexico and deepwater projects. Higher oil prices would also result in high earnings per share. The company is working on acquiring and developing assets which would provide strong results in the future and also add to its reserves. Chevron’s recent acquisition of Atlas Energy is just one example of this strategy. The company is also disposing of assets which generate lower margins. One example is the disposition of a refinery in the UK for $1.7 billion dollars.

On the negative side, there is a court ruling in Ecuador against Chevron for a potential $8.60 billion, which amounts to $4.30/share. The likelihood of CVX having to pay this entire amount however is pretty slim to none however.

Over the past decade, the return on equity increased from 10% in 2001 to 20% by 2010. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.

The annual dividend payment has increased by 8.80% per year since 2001, which is higher than the growth in EPS.

A 9% growth in distributions translates into the dividend payment doubling every eight years. If we look at historical data, going as far back as 1990, we see that Chevron has actually managed to double its dividend every ten and a half years on average.

Over the past decade the dividend payout ratio has increased, and remained mostly under 50%. This indicator spiked up on a few occasions mainly due to short term weakness in EPS caused by declines in oil and gas prices. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.

Currently Chevron is trading at 11.40 times earnings, yields 2.70% and has a sustainable dividend payout. The stock is attractively valued, and if the high oil prices are here to stay Chevron would certainly be able to enjoy high earnings per share in the foreseeable future. Despite the fact that Chevron fits my entry criteria, the massive run up in its share price since I last reviewed the stock in 2010 is makes me uneasy about committing additional capital in the stock. This being said, as long as the share price is below $115 the stock is a buy. Ideally, if the price dropped below $96, which provides an entry yield of 3%, I would probably be more bullish on the stock.

Full Disclosure: Long CVX

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