Saturday, January 11, 2014

Stock Bought: CVX

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.

13 comments:

  1. Ive been thinking of picking up some CVX to add to my position as well. Its a good time to load up on those shares.

    cheers

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    1. R2R: CVX is one of the few stocks I consider to be attractively valued at the moment, so I figured I might as well buy more shares. It's now the third-largest position in my portfolio, but I am open to the possibility of another purchase.

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  2. I like the purchase DMG, so much so that I actually have an open order ready for Monday morning to buy some more shares.

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    1. Captain: Thanks, and I like your move, too. I hope Mr. Market gives you a good chance to fill your order.

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  3. DGM,

    For some reason CVX has lagged behind XOM, BP, and COP recently. I don't know if people are rotating out of CVX into the others or not. In any case CVX is cheap from a P/E standpoint. I may buy some more shares before the end of the month.

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    1. Pipeline: I don't know why CVX has lagged its peers (perhaps it reflects continuing concern about the legal issues in Ecuador), but I view it as a well-run company with a stock that remains attractively valued.

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  4. Good purchase, DGM!

    I can not decide between
    Chevron, ExxonMobil, ConocoPhillips and Royal Dutch Shell.

    I think I have to buy every one of this companies...

    cheers
    D-S

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    1. D-S: Thanks! I think any of the names you mentioned would be good investments. My personal preferences are for CVX and XOM, mainly because I know more about them than the others.

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  5. Do you have an entry for your Dividend Discount model formula on how you got $130?

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    1. PMU: I use the following formula for the Dividend Discount Model calculation:

      Fair Value = (Div*(1+DGR/100))/((1+(Yield+DGR)/100)-(1+(DGR/100)))

      where Div = the current annualized dividend ($4.00 for CVX), Yield = the current yield (3.31%), and DGR = the estimated dividend growth rate (I used 8.5%). Plugging those numbers into the equation above gave me a fair value of $131.

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  6. Solid purchase. I like CVX here as well, but it's almost 5% of my portfolio so I'd have to think hard about buying more. I wish XOM was cheaper as I'd like to step up ownership in that particular company. I didn't buy enough before Buffett got in!

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    1. CI: It turns out CVX is exactly 5% of my portfolio right now. Another similar-sized purchase would bring it up to around 6.4%, which would be okay with me. Like you, I want to increase my XOM position, but at a better price.

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