There are certain cyclical companies—ExxonMobil, Chevron, Emerson Electric immediately come to mind—that have storied records of growing their dividends year after year that make them interesting case studies independent of most other large-cap industrials and energy companies with cyclical business models. The rising dividend is such an important distinguishing characteristic for those few cyclical companies of Chevron’s caliber because it turns uncertainty into your friend—you have a rising dividend that puts more money into even more shares as they fall 15%, 25%, 50%, or whatever.
When I study Chevron’s history, I am reminded of the Tom Lewis quote that the stock market resembles a man walking a yo-yo up the stairs where people get too distracted by the yo-yo’s movements and ignore the far more important matter of the man walking up the stairs. The spirit of that analogy certainly applies to Chevron, which hit a high price of $135.10 this summer.
When people worry about the price of companies like Chevron over the past year or so, they miss out when Chevron does over long periods of time by growing production rates substantially and paying out a big chunk of cash as dividends each year. In 2003, Chevron was making $3.48 per share in profit. The price of the stock was between $30 and $43. Profits recently grew as high as $13.44 per share in 2011, and with the recent 40% fall in oil prices, Chevron is still slated to earn over $11 over the course of 2014. Even if 2015’s numbers are a bit lower because it will lack the relatively generous first quarter of 2014 earnings, we are still talking about a company that has almost tripled profits over the past ten years despite oil prices experiencing a “slump.”
And better yet, Chevron returned a whole lot of cash over that time period, as the starting yield for most investors was between the 3% and 4% mark, so Chevron investors have collected the following dividends: $1.54 (2004), $1.75 (2005), $2.01 (2006), $2.26 (2007), $2.53 (2008), $2.66 (2009), $2.84 (2010), $3.09 (2011), $3.51 (2012), $3.90 (2013), and $4.21 (2014). Reinvesting absolutely no dividends, you would have collected $30.30 in total cash payouts from each share of Chevron that you owned before the first dividend payment came out in 2004. If you bought Chevron at the low of $30 in 2003, you would have collected your full initial investment amount over the coming years. If you waited for the 2004 highs of the cycle and paid in the $40s, you still collected over 75% of your investment amount.
Here is where things get crazy: What if you had been dutifully reinvesting your Chevron dividends into automatically created new Chevron shares each year? Because of the price fluctuations that allowed you to reinvest at lower prices, and because the dividend payout is itself high and growing, each share of Chevron has created 0.4 new shares from the 2004 through 2014 period. If you had 100 shares at the start of 2004, and did nothing but reinvest, you’d have 140 shares now. If you started out with 1,000 shares, you’d now have 1,400.
For someone that owned 1,000 shares in 2004 and did not reinvest, they went from collecting $1,540 annually in 2004 to $4,210 today. If you reinvested, you’d now have 1,400 shares paying out $4.21 each, so your payout grew from $1,540 to $5,894. If your 1,000 shares cost $35 each, your yield-on-cost would be around 16.8% so that every dollar invested into Chevron at the start of 2004 would now be paying out $0.168 to you in annual dividends.
Of course, these statistics would be meaningless if I did not conclude that Chevron still possesses the business model to deliver these returns well into the future. Right now, they are pumping out 1.8 million barrels of oil and oil equivalents each day, and I am very interested in Chevron’s investments that will be ramping up production in the summer of 2016 and early 2017 in Australia particularly. In the next year or two, any profit growth will be primarily from the price of oil, natural gas, and certain chemicals increasing, and in the two years after that, it will be a combination of production growth plus changes in commodity prices that will account for growth in Chevron’s earnings per share.
Meanwhile, they continue to do what they’ve always done: Run a portfolio with deep reserves (now totaling $176 billion), keep a conservative balance sheet (Chevron earns as much total profit in 18 months as its entire debt burden, and this is impressive given the capital intensive nature of the oil industry), the company makes $17-$18 billion per year if the price of oil were $53 per share, and a manageable dividend payout (between 35-40% of the supermajor’s profits go towards dividend payments. From my vantage point, Chevron has the same business strengths and characteristics that lead to success as the company has had for the past couple of decades, and the recent decline in oil lets you be one of those guys who bought shares at $30 rather than $45, to use the 2003 to 2004 cycle as a reference point.
Also, the longer you hold a company like Chevron, the more unfazed the volatility of commodity prices will be to you, especially if you reinvest. When people in the media scare-monger, they use the technique of finding the highest price the company ever traded at (in this case, the summer 2014 highs of $135) and then compare that to where the price of the stock is at right now.
But here’s the thing: Your household’s balance sheet will look quite different once you hold Chevron for a couple years, and I’ll give an example. In 2011, the absolute highest price that you could have paid for a share of Chevron stock was $110.00. You got to collect $14.71 in cash from 2011 through 2014. To get you at the breakeven point, the price of Chevron would need to fall to $95.29. The media would be talking about a 29% loss from the summer highs at the time the stock hit $95, but you would have been breaking even on your investment over the past four years. Chevron is one of those companies like GlaxoSmithKline and AT&T that give you much better returns than looking at a stock chart would indicate, and it has a growth profile more like Philip Morris International that gives you the best of both worlds.