Chevron Dividend – Slowing Or Growing?

By Chad Henage - May 21, 2012 | Tickers: CVX, XOM | 0 Comments

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Chevron (NYSE: CVX) is one of the largest integrated oil companies in the world. If you are looking for an inflation hedge, the company's oil and gas reserves are a good place to start. One reason that investors have loved Chevron's stock, has been the company's consistent policy of raising the dividend. In fact, for the last 25 years straight the company has raised the dividend. With such an impressive track record, there are two questions I want to answer. First, can the company afford its current dividend? Second, will the streak continue and if so are the dividend increases slowing down or speeding up?

Chevron is compared to Exxon (NYSE: XOM) on a regular basis in the stock market. They both have a long record of increasing their dividends, and operate in the same industry. I've actually thought in the past that Chevron could be the better buy of the two. My primary reasoning for this was the company's higher dividend yield. That gap has narrowed a bit, but still holds as Chevron yields about 3.58% versus Exxon's 2.78% payout. That being said, Chevron's expected growth in earnings has been all over the map in the last few years. At different points, I've seen analysts calling for 2% growth and over 10% growth. With the volatility in oil prices I guess that's to be expected. If you buy the stock today you are only paying about 7.4 times 2012 earnings, which is a little less than the average P/E of about 10 in the last 5 years.

Let me end any suspense and say that Chevron can definitely afford its current dividend. In the last two years the payout percentage has actually improved from near 50% to around 42% today. Last year the company paid out about $6 billion in dividends and generated over $14 billion in free cash flow. You can tell from those numbers that this is a company who's dividend is not in danger.

When it comes to dividend increases, look at the following chart and you tell me what the trend is:

Since 2009 the trajectory of dividend growth has been like a ski slope, nearly straight down. In the three years prior to the recession, the average dividend increase was over 13%. The most recent increase was just 3.85%. While this is somewhat understandable since just three years ago the company's free cash flow payout was negative, it's also surprising in a few ways. In the last three years, as the company's dividend growth has slowed, the company has improved their balance sheet. Long-term debt has been cut from over $11 billion in 2010 to about $9.8 billion in 2011. Cash on hand has nearly doubled in the last three years as well.

So what should investors expect in the future? Well that depends on oil prices. Analysts expect EPS growth from Chevron of about 5% in the next 5 years. In the last three years, net income growth has averaged an increase of 52%, while operating cash flow grew slower at 37%. If this trend continues, Chevron shareholders could be in for some disappointment. With 5% EPS growth, in theory operating cash flow would be 3-4%. If that is the case, unless Chevron's management wants to raise the payout percentage, then 3-4% dividend increases could be the norm. Given the large run up in oil prices in the last three years, it seems likely that prices will pause for a while. If this is the case, Chevron will have to decide how much to increase their capital expenditures. In the last three years capital expenditures have grown at a compound rate of about 11%. If the company only manages 5% net income growth, this type of cost growth will hurt the chances of an expansion in the dividend. While Chevron will likely keep up its string of dividend increases, I believe that investors need to accept the reality that the days of double-digit dividend growth is done for a while.

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