A week ago I initiated a full position in Emerson Electric, a well-respected industrial giant and dividend aristocrat. Two days later, my stock-buying frenzy continued with yet another purchase this month, this time in the energy sector. I was debating whether to invest in ExxonMobil or Chevron, but I ended up choosing the latter because I still had time to get in before its ex-dividend date on the 15th, whereas I had just missed my shot at the former’s dividend, since its ex-date was on the 11th. On 5/11/2015 I purchased 9 shares of CVX at $107.6/share, and on 5/14/2015 I doubled down in the mighty oil titan with another 11 shares at $108.32/share, for a total investment of $2151.92 at an average price of $108.00/share.
When deciding whether or not to buy a stock, I perform both a quantitative and qualitative analysis. All the data I use to calculate shit is pulled from Morningstar. So without further ado, let us first take a look at some of the numbers and ratios behind Chevron.
When looking at a company’s revenue growth, I like to compute the compound annual growth rate over 10-year, 5-year, and 3-year periods. This allows me to see whether or not the business has been growing over time and it also shows me whether the growth has been accelerating or decelerating in recent years. Here’s a chart I whipped up of Chevron’s CAGR for those 3 time intervals:
Ok, well…this mind-fuck of a graph can actually be fairly easily explained, so fret not, my sexy reader. You see, the oil industry is cyclical. Very cyclical. It’s a classic case of supply and demand. When supply is abundant, prices fall. When supply is scarce, prices rise. That’s pretty much it. Ok, I lied. It’s actually a little more complicated than that, since speculation on oil futures actually plays an important role in determining the price of oil, as do about a million other variables that come into play when looking at the global economy.
Long story short though, oil prices rose to all-time highs in 2008, then fell sharply in 2009, only to rise again sky-high in 2011, and then fall once more in 2012. And today, the prices are still falling. So, when taking into account these 2 spikes in oil prices over the last decade, the beautifully incoherent gamut of CAGRs you see above actually makes sense. I invite you to take a look at Chevron’s yearly revenue over the span of the last 10 years to better understand it all.
As you can see, revenue was $198.2 billion in 2005, and $211.97 billion in 2014. This explains the almost non-existent computed 10-year CAGR of 0.75% you see above. In 2009, the revenue sat at $171.636 billion after the sharp decline in prices that followed the peak in 2008, which is even lower than it was in 2005. So, taking that as our initial value for our 5-year CAGR, we understandably get an inflated CAGR of 4.31% since we now have a lower starting revenue number and half the time frame. Lastly, with a huge revenue of $253.706 billion in 2011 due to the spike in oil prices that year, we now have a loss of revenue between our start and end points, on top of a super low time frame of 3 years. So #zomg, the CAGR comes out to an ugly -5.82%. But does it mean Chevron is dying? No, of course not. It just means that it belongs to a cyclical industry, and its seemingly erratic revenue changes actually make perfect sense given the fluctuations of oil prices over the years. If you aren’t convinced, you’re a dumbass feel free to take a look at the annual revenue postings of any of the other big oil companies over the last decade, and you will notice the same pattern.
EPS growth is another important metric to look at because it will give you a better picture of a company’s financial health. Revenue growth is nice and dandy, but if net income isn’t increasing proportionally, then there’s clearly something wrong going on. Here’s what Chevron’s EPS CAGR looks like:
Unsurprisingly, we see the exact same pattern with the EPS as we see with the revenue. The numbers are a bit more pronounced, but the trend is the same: weak 10-year CAGR, decent 5-year CAGR, and absolutely horrendous, negative 3-year CAGR. Again, this is not something to worry about, since these numbers correspond to what was happening to oil prices over the last decade. Take a chill pill if you must, then move on forward.
Return On Equity
I like to look at a company’s return on equity to get an idea of how much profit it generates with the money that shareholders invest in it. A really low ratio can be synonymous with low profitability and begs the question of what the hell the company is doing with our cash. Chevron’s ROE was at 12.65 in 2014, which is decent, especially seeing as the industry average is only at 8.1 or so. And here again, in-line with the cyclical nature of the oil industry and the huge spikes in oil prices in 2008 and 2011, the ROE sat a high of 26.61 in 2008 and a still fairly large 21.68 in 2011.
The debt-to-equity ratio will tell you if a company has been using a lot of leverage to finance its growth. Acceptable numbers here will vary depending on the industry you’re dealing with, with some sectors like the financials sector being notorious for their high levels of debt. Chevron’s debt-to-equity ratio clocked in at a nice and low 0.16 in 2014, below the already modest industry average of 0.3.
Interest Coverage Ratio
Another important ratio I like to look at is the interest coverage ratio, which you get by dividing a company’s earnings (before taxes, interest, rainbows, etc.) by its interest expenses. I usually like to see a number above 5 here, preferably even 10, though again this can vary significantly depending on the industry we’re dealing with.
For some reason Morningstar only provides numbers for the interest coverage ratio in 2009 and 2010, which sat at a ridiculous 662.71 and 642.10 for those 2 years, respectively. So even with the current low oil prices, I’m sure Chevron still boasts a financial fortress that can ward off debt without problem.
The yield currently floats right around 4%, which is pretty damn fat. And I just love fat in the context of a company’s dividend yield. The fatter the healthier! #paradox
Chevron’s payout ratio sat around 41.5% in 2014, which is quite low and leaves the dividend plenty of room to grow.
Dividend Growth Rate
Dividend growth rate is one of the most important factors to look at as a dividend investor. Here are Chevron’s 10-year, 5-year, and 3-year dividend CAGRs:
As we can see, Chevron seems to have averaged an annual dividend growth rate of roughly 10% for the past 10 years, without much acceleration or deceleration. This is some solid, consistent growth, and, combined with Chevron’s mighty yield of 4%, gives us a Chowder number just north of 14. This is comfortably above my usual threshold of 10, so I’m a happy camper (and that’s saying a lot, since I ****** hate camping and would rather rip off my nutsack with my bare hands than go sleep in a tent).
I used a DDM (Dividend Discount Model) with a discount rate of 12% and a dividend growth rate of 8% to valuate the stock. Even though, as we saw above, the company has been averaging a very consistent annual DGR in the vicinity of 10% over the last decade, I used a DGR of 8% in my model just as a way of baking in a margin of error and playing things a little on the safer side. Using these numbers, the fair value came out to $115.56, which means that I purchased the stock at a fair, if not slightly discounted price. I can live with that!
Oil runs the world, and Chevron is one of the five “Big Oil Supermajors”, so an investment in the company = profit. Done!
In all seriousness, I doubt I will live to see a world where fossil fuels aren’t still the dominant global energy source, but even if I do, I’m fairly certain that if any companies are poised to become leaders in renewable energy, it’ll be the oil giants. It’s only natural for companies with their kind of reach, scale, influence, and power (pun intended) to increasingly transition into the renewable energy space as society advances.
So that’s yet another stock purchase in the books! Adding Chevron to my portfolio increases my passive annual income by $85 or so. Dayummm, that is one sexy number! Well, it is to me at least, as it effectively makes Chevron my biggest-paying position. Gotta love those juicy dividends that will start flowing in my pockets as of next month, just for being a teeny tiny part-owner in this beast of a company. Yay! 😀
What’s your opinion of Chevron? What do you think of the current oil situation? Do you view it as just another storm that will pass, or are you legitimately concerned/think the apocalypse is upon us?
Disclosure: long CVX