Monday, December 15, 2014

Chevron like it at $120 and $69

If you liked Chevron at $120 will you still like it a $99 or how about $69? 

Since I started writing my income investing blog, Chevron, symbol CVX made the grade as a Dividend Machine in every one of the four portfolios (2011, 2012, 2013 and 2014) I created using my four Dividend Machine criteria.  Stocks I call Dividend Machines are one of three investments I use to create income.

The four criteria I used to pick Dividend Machines are: yield had to be no less than 3% until 2014 when I upped the minimal yield to 3.5%;  EPS (earnings per share) during the previous four quarters had to be greater than the dividend paid out during the previous four quarters; dividends had to grow consistently and in 2014 I required a 5 years history of at least 4% annual dividend increases; and finally D/E (debt to equity ratio) had to be 1 or less or within industry standards.

Chevron as a Dividend Machine

The first time I picked Chevron was January 31, 2011; CVX’s price that day was $93.37.  In 2012 I picked CVX on June 25, 2012 at a price of $98.90.  In 2013 and 2014, CVX’s stock price was about $120; December 13, 2013 $120.50 and finally January 20, 2014 at $119.29.

I buy stocks for income and while I do not like to lose money when prices fluctuate, I have confidence in my four criteria.   With good D/E ratios I am pretty sure my companies are not going to go bankrupt.  The key question is will the Dividend be safe and will the dividend increases continue?
I tend to hold onto my Dividend Machines through thick and thin. 

The question is if I liked Chevron at $120 will I add at $99?   Will I add at $69?   Will I sell in a panic? A real bear market scares everyone.

Effect of Crude Oil Price on Chevron’ stock price

Oil prices have a major effect on oil company stock prices. Oil prices also drive earnings of these companies.    Earnings drive dividends so it is important to look at the relationship between oil prices and CVX stock price.

Below are two charts:  one is the chart of crude oil over the past 10 years and the other is a chart of Chevron’s stock price over the same period.   You can see a similar pattern.  

In 2009 the price of crude dipped to just above $40 and Chevron’s price dipped to around $60.  In 2008 crude spiked at around $140 and Chevron’s price was up but it did not spike as much as crude.  Yet in 2014 with crude at about $110, Chevron’s price was very strong hitting the $130 mark.  The point is that crude oil prices are slumping and that will affect Chevron’s stock price.  You may get the chance to buy CVX at $99 or maybe even $69.   Should you buy?

Source: NASDAQ

stock chart

Effect of Oil prices on Earnings and Dividends

Let’s look at earnings during these times of tumult where crude prices moved a lot and so did Chevron’s stock price.   Earnings drive dividends and as income investors, we care about dividends.  Between 2004 and 2014 Chevron’s earnings moved from $6.28 per share in 2004 to $10.86 per share most recently.   This has not been a straight line up.   During this 10 year period some years were better than others and lately earnings have declined.   This is not unusual.  Earnings also declined during the crude slump in 2009. 

Dividends, on the other hand have had a straight line up.   In 2004 Chevron’s quarterly dividend was $.40 and today it is $1.07.    I do not fear crude oil prices declines, nor do I fear the related earnings declines because history suggests that Chevron will continue to pay the dividend and even increase it.

The answer is yes; I will like it at $99 and I will like it even more at $69.


Long CVX