The Best Big Oil Stock

Timothy is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Editor's Note: We feel the omission of the Deepwater Horizon oil spill materially changes this analysis. We have removed BP from this article and modified passsages accordingly. The Motley Fool regrets the error.

When it comes to dividend stocks, reliability is one of the key factors. And few companies are more reliable than the large, integrated oil companies that dominate the energy industry. With annual revenues in the hundreds of billions of dollars and a truly global footprint these companies should continue to generate ample profits for years to come.

Out of the largest four integrated oil companies it's actually the smallest, Chevron (NYSE: CVX), that offers the most compelling dividend. With TTM sales of $241 billion, Chevron is just half the size of behemoth ExxonMobil (NYSE: XOM) and a distant third to the European Royal Dutch Shell (NYSE: RDS-A).

Yield Isn't Everything

When comparing dividends the yield is only half of the equation; dividend growth is equally important. Here are the current dividend yields of these four companies, based on the most recent quarterly payment:

<table> <thead> <tr><th>Company</th><th>Dividend Yield</th></tr> </thead> <tbody> <tr> <td>XOM</td> <td>2.52%</td> </tr> <tr> <td>CVX</td> <td>3.12%</td> </tr> <tr> <td>RDS.A</td> <td>4.18%</td> </tr> </tbody> </table>

Just looking at the dividend yield it would appear that Shell blows the competition out of the water and the two American companies bringing up the rear. But the sobering fact is that Shell has held constant their dividend within the last five years, while Exxon and Chevron steadily increased it each and every year.

Annual Dividend Payments

<table> <thead> <tr><th>Year</th><th>XOM</th><th>CVX</th><th>RDS.A</th></tr> </thead> <tbody> <tr> <td>2012</td> <td>$2.18</td> <td>$3.51</td> <td>$3.44</td> </tr> <tr> <td>2011</td> <td>$1.85</td> <td>$3.09</td> <td>$3.36</td> </tr> <tr> <td>2010</td> <td>$1.74</td> <td>$2.84</td> <td>$3.36</td> </tr> <tr> <td>2009</td> <td>$1.66</td> <td>$2.66</td> <td>$3.36</td> </tr> <tr> <td>2008</td> <td>$1.55</td> <td>$2.53</td> <td>$3.20</td> </tr> </tbody> </table>

Data from Exxon, Chevron, and Shell, investor relations.

Every year, even through the financial crisis, both Exxon and Chevron increased their respective dividends. Exxon grew the dividend at an annualized rate of 7.06%, slightly faster than the 6.77% rate for Chevron. Meanwhile, Shell grew its dividend at an anemic 1.46% annually including three years where the dividend was held constant.

Stagnant and/or decreasing dividend payments are anathema to the dividend investor, thus leaving only Exxon and Chevron as reasonable choices. With extremely similar historic growth rates Chevron's yield advantage makes the company a superior choice. While Exxon's five-year dividend growth is about 4% greater than that of Chevron, Chevron's current yield is a full 23% greater than that of Exxon. This imbalance swings things in favor of Chevron.

What Price To Pay?

This leads us to the question: how much should you pay for a share of Chevron? To answer this, I'll use the dividend discount model. I like to use a discount rate of 8% for this type of calculation, which is roughly the long-term growth rate of the market as a whole. Now, instead of attempting to calculate a share price by plugging in an estimated growth rate, I'll do the opposite. Given the current share price of $115.22, at what rate does Chevron's dividend need to grow for the stock to be fairly valued? I'll use a two-stage model: 20 years of growth at a specific rate, which I will determine from the calculation, and then 3% growth in perpetuity.

<img src="/media/images/user_13886/cvx-div-top_large.png" />

<img src="/media/images/user_13886/cvx-div-bottom_large.png" />

Using the above parameters Chevron must grow its dividend at 6.30% annually over the next 20 years for the shares to be fairly priced today. Given that this is below the 5-year rate, a time where the world saw a major economic crisis, and well below the growth of 13.6% between 2011 and 2012, I think it's safe to say that Chevron offers a great value for the dividend investor.

The Bottom Line

While higher yields may draw some to Shell, the quality of dividend growth in both cases is suspect at best. Exxon has the highest growth rate but an inferior yield while Chevron nearly matches Exxon on growth while maintaining a yield which makes it the best choice of all four companies. At today's prices, Chevron offers a compelling value for dividend investors looking for stability as well as growth.

TheBargainBin has no position in any stocks mentioned. The Motley Fool recommends Chevron. The Motley Fool owns shares of ExxonMobil. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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