Yesterday I bought shares of Chevron (CVX), one of the largest integrated oil and gas companies in the world. My most recent previous purchase of CVX was in November 2013. The stock price dipped after the company released an interim update on Thursday in which they stated that "earnings for the fourth quarter 2013 are expected to be comparable with third quarter 2013 results." Evidently, this news disappointed some investors and traders.
I think CVX is slightly undervalued at the current price. It has a P/E of 9.9 (vs. a 5-year historical average of 9.3), P/S of 1.1 (vs. 0.8), P/B of 1.6 (vs. 1.7), and dividend yield of 3.3% (vs. 3.2%). Using a Dividend Discount Model with a dividend growth rate of 8.5% (slightly lower than recent dividend increases) and a discount rate equal to the current yield plus the dividend growth rate, I calculate a fair value of $131.00. Morningstar gives a fair value of $130.00 and a 4-star rating. The average of those two estimates is $130.50, which implies a 7.5% margin of safety at my purchase price.
I bought 15 shares of CVX at the price of $120.74 per share plus commission, giving me a 3.30% yield on cost. At the current dividend rate, I can expect to receive quarterly dividends of $15.00 from this purchase, which will add a total of $60.00 to my annual dividend income. This purchase was made in my Roth IRA using rollover money. I now have a total of 55 shares of CVX and I will receive combined quarterly dividends of $55.00. My forward 12-month dividend total increases to $3,972.