Matthew Waterman
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Company Profile: Chevron Corporation Is Worth $185 A Share In 5 Years

I'm continuing with my multipart series talking about the "big oil" companies. The first of these articles covered Exxon-Mobil (XOM), and you will find it here

Today we are looking at Chevron-Texaco (CVX), also built from companies that were previously part of the Standard Oil Company. That's going to be a recurring theme in this series because basically every oil company today has roots in Standard Oil.

As before, a breakdown of the basic metrics:

  • Market Cap: $168.12 billion
  • Earnings per share (ttm) $4.61
  • Price/Earnings Ratio: 19.39
  • Dividend amount annual $4.28
  • Dividend Yield: 4.95%
  • 5 year dividends per share growth rate: 8.62%
  • 5 year earnings per share growth rate: 11.40%

At the close of market today, CVX sold for $89.33 per share. Please see the previous article for an explanation of "Earnings per dollar". Here are the numbers to expect sticking with CVX for 5 years:

4.61 (Earnings per share) / 89.33 (Dollars per share cost) = .0516 or 5.16 cents earned per dollar invested in the company.

4.28 (Dividends per share) / 89.33 = 0.479, or 4.79 cents in dividends per dollar invested,.

5.16 * 1.1140 compounded 5 times = $.0885 in earnings

4.79* 1.0862 compounded 5 times = $.0724 in dividends

So what an investor might expect to earn for each dollar invested after 5 years is:

71.5% compounded increase in earnings, and a 51% increase in dividends. The sum of those percentages, divided in half is 61.25% economic earnings growth. 

Something important I forgot to mention in the last post:

The reason I split the growth in dividends and EPS is that companies pay their dividends out of earnings. So when earnings are good, the dividend grows faster, and when they are poor, the payments grow slower. Splitting the percentages in half is a good way to not put too much emphasis on one over the other. I know far too many dividend growth investors who are attracted to high yields alone, and do not pay attention to this. 

Your 5 year estimated growth in this investment, all else equal and consistent, should be to $144.04 per share. I use today's P/E multiple when determining the futuer EE per share. $144.04 / 19.39 = $7.429. 

In a bear market at 10x EE your low estimate is $74.29 per share, and in a bullish market at 25x EE you get $185.71. Just as before, the longer you hold your shares, the more likely you are to get closer to the higher number. If you are at the low number in 5 years, just remember that there is always another bull market around the corner. 

So now you are able to see how to make a relative valuation against other companies in the same business. The future growth potential of Chevron seems less attractive compared to Exxon-Mobil, even with the higher current yield. If I were going to tell you to buy one or the other today, it's probably going to push me towards XOM.