The oil and gas industry has been a great place to generate high dividend income and capital appreciation ever since John D. Rockefeller revolutionized it. Chevron (CVX), one of the world’s largest oil majors with its roots in Rockefeller’s Standard Oil, is yielding 3.70% in dividends at current prices.
Chevron (CVX) manages its investments in subsidiaries and affiliates, and provides administrative, financial, management and technology support to United States and international subsidiaries that engage in fully integrated petroleum operations, chemicals operations, mining operations, power generation and energy services. Exploration and production (upstream) operations consist of exploring for, developing and producing crude oil and natural gas, and also marketing natural gas. Refining, marketing and transportation (downstream) operations relate to refining crude oil and converting natural gas into finished petroleum products; marketing crude oil and the many products derived from petroleum, and transporting crude oil, natural gas and petroleum products by pipeline, marine vessel, motor equipment and rail car.
Chevron (CVX) trades at a price to earnings ratio of 11.8 times, a price to sales of 0.85 and a price to cash flow of just over 6. The company has a debt to equity ratio of 9.76% which is way below the industry average, contributing to financial strength. It generates a return on equity of 14.45% and a return on investment of 9.6%, which both prove the company can compete with its peers who all generate similar returns.
Net income in 2009 was down 56% from 2008 largely due to lower oil prices and sales, but earnings for the first quarter of fiscal 2010 have rebounded strongly. Profit for the three months ended March 30 this year more than doubled to $4.55 billion, or $2.27 a share, from $1.84 billion, or 92 cents a share, in the year-ago period. If earnings follow this same trend they’ll be in line with 2008 earnings of $23 billion, an all time high. It’s clear to see why earnings are coming back so strongly: The company's average sales price per barrel of crude oil nearly doubled to $71, compared with $36 a year ago, and the average sales price of natural gas rose to $5.29 per thousand cubic feet, up from $4.14 in last year's first quarter.
Chevron’s (CVX) dividend record is exemplary and despite earnings falling off a cliff last year the dividend came in at $2.66, higher than it’s ever been. That payout is a 52% increase over five years and represents an 11% compound annual growth rate.
Increased demand for oil from the world’s emerging economies such as China, Brazil, India and Russia is likely to cause price escalations. Supply is also constrained going forward as oil is getting more expensive to extract and refine. OPEC has also continually shown that oil at $70 per barrel is the floor with which they are looking to work.
In addition, the BP oil spill has made not only that company but others in the industry more attractive from a valuation standpoint. Increased regulation and liability could be an issue going forward but I don’t think it’s going to affect the future dividend payments of Chevron (CVX) to any great extent. Chevron (CVX) is a great company with excellent management, conservatively financed and with great cash flows.
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