Chevron Corporation (CVX) Dividend Stock Analysis 2012

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. This dividend champion has paid dividends since 1912 and increased distributions on its common stock for 25 years in a row.

The company’s last dividend increase was in April 2012 when the Board of Directors approved an 11.10% increase to 90 cents/share. This was the second increase in one year. The company’s largest competitors include Exxon Mobil (XOM), British Petroleum (BP) and Royal Dutch (RDS.B).

Over the past decade this dividend growth stock has delivered an annualized total return of 15.10% to its shareholders.

The company has managed to an impressive increase in annual EPS growth since 2002. Earnings per share have risen from 0.54/share in 2004 to $13.44 in 2011. Analysts expect Chevron Corporation to earn $12.71 per share in 2012 and $12.91 per share in 2013. In comparison Chevron Corporation earned $13.44/share in 2011.

New field developments are expected to generate 1% annual production growth through 2014 and then 4%- 5% for the next four 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. Natural gas prices overseas have been more competitive overseas, in comparison to the US, which is a positive. While oil is easier to transport, natural gas is not. The company is working on acquiring and developing assets which would provide strong results in the future and also add to its reserves. Chevron is better positioned than peers, since it has a larger exposure to more lucrative oil fields, versus natural gas fields. Chevron’s recent acquisition of Atlas Energy is just one example of this strategy. The acquisition has provided Chevron with access to the Marcelus Shale. The company is also disposing of assets which generate lower margins. Chevron is working on disposing of its lower margin refining business.

On the negative side, there is a court ruling in Ecuador against Chevron for a potential $18 billion. The likelihood of CVX having to pay this entire amount however is pretty slim to none however. Another potential dispute could occur in Brazil, related to Frade Field leak there.

The return on equity has closely followed the rise and fall in oil and natural gas prices. It rose between 2002 and 2007, then dipped in 2009, before rebounding strongly. 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 9.20% per year over the past decade, which is lower than to 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 1983 we see that Chevron Corporation has actually managed to double its dividend every ten years on average.

The dividend payout ratio has remained below % for the majority of the past decade. 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 Corporation is attractively valued at 8 times earnings, yields 3.30% and has an adequately covered dividend.

Full Disclosure: Long CVX, XOM and RDS.B

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Dividend Stocks Deliver a Return in Any Market Condition

Investors can generate a return on their investment through capital gains, dividends or a combination of both. Quality dividend stocks typically provide investors with a return on investment any time the distribution arrives in the brokerage account of the shareholder. As a result, long-term investors typically look for quality dividend stocks as a way to generate returns which are not at the mercy of the stock market, but are rather directly linked to the actual financial performance of the corporation. Living off dividends is particularly important for investors who need income in retirement, and would not like to reduce the number of shares they own in order to maintain their lifestyle.

In order to generate a rising dividend income however, investors need to build a portfolio of carefully selected dividend stocks. Only after this has been accomplished, investors could sit back and get paid for waiting until the market realizes the value that shares are offering.

In my dividend investing, I focus on companies which are part of the dividend achievers and the dividend champions lists. I then apply my entry criteria in order to narrow down the list to a few candidates for further research. After that I look at the story behind the company and try to understand how it generates income. I look for companies whose products or services would still be used by consumers a few decades from now, and which have a strong competitive advantage over competitors. This wide moat would protect the business and build a strong foundation for future growth.

In addition, ensuring that the dividend is sustainable out of earnings and cash flows is essential for investors. This helps in maintaining stability of dividend income during recessions, as companies that have temporary dips in earnings would be less likely to cut dividends. In addition, companies with long histories of increasing dividends, would be less likely to cut distributions and enrage long term stockholders, unless the financial situation is dire. As a result, investors who live off dividends in retirement would not have to worry about market fluctuations. The regular dividend payments arriving in their brokerage accounts, like clockwork, would provide positive feedback that the companies they have invested in are still generating sufficient profits. As a result it does not really matter much to dividend investors if the market is down 20% or up 20% in a given year. As long as the underlying businesses of the carefully selected dividend paying stocks are still sound, then long term returns of share prices should be sufficient to at least match market returns.

The idea of relying solely on dividend income in retirement was tested for many retirees during the 2007- 2009 financial crisis. While many financial companies cut or eliminated their distributions, investors who held broadly diversified portfolios fared limited losses in income. During the darkest times, there were companies that still kept on raising distributions and extending streaks of consecutive dividend increases. Such companies included:

Kinder Morgan Energy Partners, L.P. (KMP) operates as a pipeline transportation and energy storage company in North America. The partnership distributed $3.39/unit in 2007, and then kept boosting distributions even throughout the crisis. The partnership distributed $4.58/unit in 2011. This MLP has raised distributions for 16 years in a row, and has a ten year distributions growth rate of 8.20%/year. Yield: 6.20%(analysis)

Wal-Mart Stores, Inc. (WMT) operates retail stores in various formats worldwide. The company paid $0.8275/share in 2007, and then kept boosting distributions during the financial crisis. The largest retailer in the world boosted dividends to $1.3975/share in 2011. The company has raised distributions for 38 years in a row, and has a ten year distributions growth rate of 17.90%/year. Yield: 2.10% (analysis)

McDonald’s Corporation (MCD), together with its subsidiaries, franchises and operates McDonald’s restaurants primarily in the United States, Europe, the Asia Pacific, the Middle East, and Africa. The company paid $1.50/share in 2007, and then kept boosting distributions. The fast food chain with the most recognizable brand in the world boosted dividends all the way to $2.53/share in 2011. The company has raised distributions for 35 years in a row, and has a ten year distributions growth rate of 27.40%/year. Yield:  3.10% (analysis)

Full Disclosure: Long MCD, WMT, KMP

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Thirteen Income Stocks Boosting Investor Returns

Over the past week, income stocks announced plans to boost distributions to shareholders. Of the lengthy list of dividend increases, I have only included companies which have managed to raise distributions for more than five years in a row. In addition, I have separated the stocks by group, while also providing my commentary on each group.

Master Limited Partnerships

Master limited partnerships are typically pass-through entities, which distribute a large portion of their cash flows to investors. Most MLPs are pipelines, which transport oil and gas, although there are others like Alliance which mines for coal. For MLPs, I typically try to focus on pipelines, since the volume of carbons transported is typically very stable, which bodes well for cash flows and therefore results in dependable distributions to unitholders. In addition, I also focus on coverage of distributions and prefer it to be either trending lower or at least flat for a long period of time.

Enbridge Energy Partners, L.P. (EEP) owns and operates crude oil and liquid petroleum transportation and storage assets, as well as natural gas gathering, treating, processing, transmission, and marketing assets in the United States. This master limited partnership boosted quarterly distributions to 54.35 cents/unit. Enbridge Energy Partners has boosted distributions for 6 years in a row. I own the i-shares of Enbridge Energy Partners, which trade under ticker EEQ, and which distribute shares instead of cash to me every quarter. EEQ and KMR are examples of i-shares for Enbridge Energy Partners and Kinder Morgan Partners, which make them ideal for tax-deferred accounts.Yield: 7.30%

Alliance Holdings GP, L.P (AHGP), through its subsidiaries, produces and markets coal primarily to utilities and industrial users in the United States. The general partner of Alliance Resources boosted quarterly distributions to 69.75 cents/unit. Alliance Holdings has boosted distributions for 7 years in a row. Yield: 6%

Alliance Resource Partners, L.P. (ARLP) engages in the production and marketing of coal primarily to utilities and industrial users in the United States. This master limited partnership boosted quarterly distributions to $1.0625/unit. Alliance Resource Partners has boosted distributions for 10 years in a row. Yield: 7.10%

Exterran Partners, L.P. (EXLP) provides natural gas contract operations services to customers in the United States. This master limited partnership boosted quarterly distributions to 50.25 cents/unit. Exterran Partners has boosted distributions for 6 years in a row. Yield: 9%

Dividend Champions

Dividend champions are companies which have managed to boost distributions for at least 25 years in a row. Four such companies include American States Water, Dover Corporation, Federal Realty Investment Trust and Carlisle. I currently find Dover to be attractively valued, and would add it to my list for future research. I find Federal Realty Trust and Carlisle to be trading at higher valuations than what I would like to pay for them. American States Water seems like a dependable utility, which unfortunately doesn’t yield as much as one would expect a slow growth business to yield. The hunger for yield has pushed investors to bid up assets like Utilities and REITs close to bubble territory.

American States Water Company (AWR), together with its subsidiaries, provides water, electric, and contracted services in the United States. This dividend king raised its quarterly distributions by 26.80% to cents/share. American States Water has boosted distributions for 58 years in a row. Yield: 3.50%

Dover Corporation (DOV) manufactures and sells a range of specialized products and components, and provides related services and consumables. The company operates in four segments: Communication Technologies, Energy, Engineered Systems, and Printing & Identification. This dividend king raised its quarterly distributions by 11.10% to 35 cents/share. American States Water has boosted distributions for 58 years in a row. Yield: 2.60%

Federal Realty Investment Trust (FRT) operates as a real estate investment trust, which engages in the ownership, management, development, and redevelopment of retail and mixed-use properties. This dividend champion raised its quarterly distributions by 5.80% to 73 cents/share. Federal Realty Investment Trust has boosted distributions for 45 years in a row. Yield: 2.70%

Carlisle Companies Incorporated (CSL) operates as a diversified manufacturing company in the United States and internationally. This dividend champion raised its quarterly distributions by 11.10% to 20 cents/share. Carlisle Companies has boosted distributions for 36 years in a row. Yield: 1.60%

Current Dividend Achievers and Future Dividend Achievers

The dividend achievers index includes companies which have raised distributions for at least ten consecutive years in a row. I typically prefer to invest in companies that have a proven track record of 10 years in consistent dividend increases, in order to avoid purchasing companies whose streak is a result of a pure luck of being at the right time at the right place in an economic cycle. Of the companies listed above, Norfolk Southern looks like a promising candidate for further research, since it meets all of my entry criteria at the moment. Buffett finds railroards to be a long-term bet on the US, and I agree with him that the volume of goods transported over the next century is going to increase.

Norfolk Southern Corporation (NSC), through its subsidiaries, engages in the rail transportation of raw materials, intermediate products, and finished goods primarily in the United States. This dividend achiever raised its quarterly distributions by 6.40% to 50 cents/share. Norfolk Southern Corporation has boosted distributions for 12 years in a row. Yield: 2.70% (analysis)

Microchip Technology Incorporated (MCHP) engages in the development, manufacture, and sale of semiconductor products for embedded control applications. This dividend achiever raised its quarterly distributions to 35.10 cents/share Microchip Technology has boosted distributions for 11 years in a row. Unfortunately, the company has a very high dividend payout ratio, which has caused it to boost distributions only by a nominal amount each quarter. Yield: 4.10%

Murphy Oil Corporation (MUR), through its subsidiaries, engages in the exploration and production of oil and gas properties worldwide. This dividend achiever raised its quarterly distributions by 13.60% to 31.25 cents/share. Murphy Oil Corporation has boosted distributions for 16 years in a row. Yield: 2.30%

Hawkins, Inc. (HWKN) distributes bulk chemicals, as well as blends, manufactures, and distributes specialty chemicals. The company operates through two segments, Industrial and Water Treatment. This dividend stock raised its quarterly distributions by 6.30% to 34 cents/share. Hawkins has boosted distributions for 8 years in a row. Yield: 1.70%

STERIS Corporation (STE), together with its subsidiaries, develops, manufactures, and markets infection prevention, contamination control, microbial reduction, and surgical support products and services for healthcare, pharmaceutical, scientific, research, industrial, and governmental customers worldwide. This dividend stock raised its quarterly distributions by 11.80% to 19 cents/share. STERIS has boosted distributions for 8 years in a row. I would consider researching the company for future. Yield: 2.40%

Full Disclosure: Long EEQ

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Philip Morris International (PM) Dividend Stock Analysis

Philip Morris International Inc. (PM), through its subsidiaries, manufactures and sells cigarettes and other tobacco products. Its portfolio of international and local brands include Marlboro, Merit, Parliament, Virginia Slims, L&M, Chesterfield, Bond Street, Lark, Muratti, Next, Philip Morris, and Red & White. The company was created after the spin-off of Altria Group’s (MO) international operations in 2008.

The spin-off was orchestrated in an effort to separate international operations from regulation and litigation risk in the US.

Philip Morris International has managed to boost distributions in each year since the spin-off. Quarterly distributions have increased from 46 cents/share in 2008 to 77 cents/share in 2011. I expect low double digit growth in distributions over the next five – ten years. This will be driven by strong performance by company’s brand name products globally, which will drive profitability higher.

The growth in earnings per share will be driven by several factors. The company expects to generate 10%- 12% annual growth in earnings through its cost reduction programs, acquiring companies internationally as well as innovating in growing markets in order to position itself favorably.

This company has strong pricing power for this addictive product. Taxes represent a high proportion of the sales price for every pack of cigarette and they are increased every year. As a result, it is very easy for companies like PMI to increase amounts of revenues it generates from each pack sold and still manage to offset the effect of lower consumption over time. PMI's pricing is strong, as consumers tend to stick to cigarettes they are used to. Another way that the company will be able to generate increases in earnings is through cost containment and efficiency measures.

Internal growth could be aided by redesign of packaging, introductions of new products as well as expansion in new markets. Phillip Morris International does not have significant exposure to China and India, which account for over a third of world population. The number of smokers is likely to increase in emerging markets, while in mature markets such as Europe it will likely decline over time.

In addition, the company plans to grow through acquisitions. In recent years it has managed to create joint ventures in the Philippines and Sweden. It has also been active in acquiring Rothmans in 2008 and Swedish Match South Africa and Petteroes in 2009.

Phillip Morris International generates a healthy amount of cash flows each year. A portion of this cash flow is used in stock buybacks. The number of shares outstanding has declined from 2.076 billion in 2008 to 1.762 billion in 2011.

There are many challenged facing the cigarette manufacturers. Smoking is associated with health issues, consumption is declining, there is increased government regulation and there is also the risk of litigation. Because of all these risks, tobacco stocks have historically traded at low P/E ratios and paid above average dividend yields. While tobacco companies could lose everything if the product is banned, the likelihood of that happening is remote. The reason behind it is the fact that cash strapped governments worldwide generate vast amounts of revenues by heavy taxation of tobacco products. Thus, governments would be unlikely to sacrifice this cash cow, since they would have to find other ways to increase taxation. Taxing cigarette consumption is a popular tax, whereas taxing income or reducing health benefits would be hugely unpopular measures.

The heavy regulation, high excise taxes, inability to advertise in most markets, and risk of litigation create barriers for entry that prevents new competitors from entering the market. As a result, large and established conglomerates such as Phillip Morris International can enjoy a strong pricing power, and a wide moat.

Currently, PMI is trading at 17.90 times earnings, yields 3.40% and has a sustainable dividend payment. I like the company’s high current yield as well as the potential for strong dividend growth. Phillip Morris International is already my largest position due to my bullishness for the stock as well as its strong performance. Nevertheless, I would consider adding to my position subject to availability of funds.

Full Disclosure: Long PM and MO

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Dividend Stocks For Long Term Wealth Accumulation

Between 1972 and 2010, S&P 500 has increased from 102.09 to 1257 points. If you add in the reinvested dividends received each year, the index should have been sitting at 2,752. Given this simple calculation, it is no wonder that investors, who focus on stocks paying a dividend, have an apparent edge in the markets. The edge consists of the fact that their stocks will increase in price over time, while also receiving another form of return in the form of dividends. The dividend return is not dependent on the stock market and is typically less volatile than the return on capital gains. The dividend return can never be negative.

Companies that pay dividends are typically mature enterprises, with a proven business model that generates enormous amounts of free cash flow. These companies do not need to reinvest all of their profits in order to maintain and grow their business. In essence they “spend” less than what they earn, and share the excess with shareholders in the form of dividend payments. On aggregate, such companies are the proven winners in the constant battle to win their customer’s hard earned dollars. Shareholders of these companies can generate price returns when the stock prices increase, and dividend return when they receive their distributions. Thus, during prolonged bear markets, investors will receive at least some return on their investment in the form of dividends, until the stock prices recover.

Companies that manage to grow while paying dividends are akin to individuals who spend less than what they earn. In comparison, most companies that invest all of their earnings back in the business all the time are typically riskier propositions. Chances are that companies that invest everything back into the business are doing so because of unfavorable economics or simply because their products or services would be rendered obsolete in a short period of time. While one could cherry pick successful non dividend paying companies like Berkshire Hathaway (BRK.B), on aggregate, investors in non-dividend stocks are likely to earn miniscule total returns over time. Reinvesting all profits into the business is akin to an individual living paycheck to paycheck. After all, investors in such companies will only realize a return on investment if they dispose of their stock, only when someone else is willing to purchase the stock at a higher price.

According to research from Ned Davis Research, dividend paying stocks in the S&P 500 outperformed non-dividend paying stocks in the index. A $1000 investment in income stocks in 1972 resulted in $27,110 by January 2011, versus $1940 for non-dividend paying stocks. This equates to a 8.80% annual return for dividend stocks, which is significantly higher than the 1.70% annual return of non dividend stocks. In comparison, S&P 500 delivered a 7.30% annual return over the same period. In other words, a $1000 investment in the index in 1972 increased to $16,100 by early 2011.

Past Performance is not a guarantee for future results. On the other hand, the significant outperformance of dividend paying stocks, and especially dividend growth stocks is hard to ignore. In a world where stocks are being held for seconds, buy and hold investing seems obsolete. The long term wealth potential for patient dividend investors who reinvest their distributions year in and year out is out there.

In order to capitalize on their dividend edge, investors should focus on companies which can afford to consistently increase dividends, have sustainable dividend payouts, are attractively valued and have strong competitive advantages. In addition, investors should also try to maintain a diversified dividend portfolio, consisting of at least 30 individual stocks, spread out across as many sectors as possible.

The types of dividend stocks that investors could currently scoop-in at low prices include:

Air Products and Chemicals, Inc. (APD) provides atmospheric gases, process and specialty gases, performance materials, equipment, and services worldwide. This dividend aristocrat has raised distributions for 30 years in a row. The company has managed to boost dividends by 11.10%/year over the past decade. Currently, it is attractively valued at 12.80 times earnings, yields 3.20% and has an adequately covered dividend. (analysis)

The Clorox Company (CLX) manufactures and markets consumer and institutional products worldwide. This dividend aristocrat has raised distributions for 35 years in a row. The company has managed to boost dividends by 10.60%/year over the past decade. Currently, it is attractively valued at 17.90 times earnings, yields 3.50% and has an adequately covered dividend. (analysis)

Emerson Electric Co. (EMR) operates as a diversified technology company worldwide. It engages in designing and supplying products and technology, and delivering engineering services and solutions to industrial, commercial, and consumer markets. This dividend king has raised distributions for 55 years in a row. The company has managed to boost dividends by 6.40%/year over the past decade. Currently, it is attractively valued at 15 times earnings, yields 3.30% and has an adequately covered dividend. (analysis)

Lowe’s Companies, Inc. (LOW), together with its subsidiaries, operates as a home improvement retailer. This dividend aristocrat has raised distributions for 50 years in a row. The company has managed to boost dividends by 29.60%/year over the past decade. Currently, it is attractively valued at 16.40 times earnings, yields 2.50% and has an adequately covered dividend. (analysis)

United Technologies Corporation (UTX) provides technology products and services to the building systems and aerospace industries worldwide. This dividend achiever has raised distributions for 19 years in a row. The company has managed to boost dividends by 15.30%/year over the past decade. Currently, it is attractively valued at 15.60 times earnings, yields 2.90% and has an adequately covered dividend. (analysis)

These five dividend stocks have raised distributions for over a decade each, trade at less than 20 times earnings and yield over 2.50%, while also having a sustainable dividend payout ratio. Purchasing attractively valued stocks, which have the business model that could generate higher earnings over time, will increase investors chances to earn higher dividend income in the future, and building wealth.

Full Disclosure: Long APD, EMR, LOW, UTX, CLX

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