Archives for October 2011

Chevron Corporation (CVX) Dividend Stock


Chevron (CVX) is a leading energy company involved in crude oil, natural gas, and other energy production.

-Five year revenue growth: erratic/flat
-Five year earnings growth: 7.7%
-Five year dividend growth: 10%
-Current dividend yield: 2.96%
-Balance Sheet: Very Strong

I consider Chevron a reasonable investment at the current valuation, but would only invest with conservative predictions about oil prices.


Founded in 1879, Chevron (NYSE: CVX) is currently one of the largest oil and gas companies in the world.

In 2010, Chevron reported a net production of 1.923 million barrels of crude oil and natural gas liquids per day, and 5.040 billion cubic feet of natural gas per day. The proved reserves within the consolidated companies are 4.270 billion barrels of crude oil and natural gas liquids, and 20.755 trillion cubic feet of natural gas.


Chevron is divided into a number of different businesses. Some of them are directly profitable while others are supplementary to meeting Chevron’s needs.

As a breakdown for total 2010 earnings of $19.024 billion, $17.677 billion came from upstream projects (exploration, production), $2.478 billion came from downstream projects (refining, marketing, transportation), and ($1.131 billion) was attributable to all other sources. Even among supermajor oil companies, Chevron is particularly focused on upstream projects and therefore is most directly linked to the price of these resources.

Oil Exploration

Chevron extracts oil from locations around the world, including from deepwater wells in the Gulf of Mexico and off of other coasts such as Brazil, from offshore wells in Europe and other locations, and on land from California, Africa, Kazakhstan, and other places.

Natural Gas Exploration

Chevron’s natural gas portfolio stretches across six continents. Chevron has the ability to transport natural gas from production locations to user locations by means of pipelines, liquefied natural gas (LNG), and gas-to-liquid (GTL) technology.


Chevron has the capability to turn its basic produced resources into finished materials ready for use. Seven refineries make up three-quarters of Chevron’s total fuel refining capability.

Supply and Trading

Chevron’s requirements to get materials from upstream projects to downstream projects is huge. Chevron has to develop and maintain logistics and partners to get products to where they need to be safely and for a low cost. For instance, Chevron markets aviation fuel at more than 875 airports and is the leading marketer of jet fuels in the US.


Chevron operates the three brands of Chevron, Texaco, and Caltex to drivers across the world.


Chevron operates and invests in pipelines around the world. Significant projects are located in North America, Asia, and Africa.


Chevron markets lubricants on six continents.


Headquarted in California, Chevron Shipping commissioned their first ship in 1895 and now ships crude oil, liquefied gas, and refined products to customers globally.


Chevron’s chemical products are incredibly diverse, with uses in food packaging, electronics, to medicine.


Chevron operates three coal mines and a Molybdenum mine in the US.


In addition to producing resources for power generation, Chevron directly generates a fair amount of power. Much of the power is derived from natural gas, while some is from wind. Chevron is the largest producer of geothermal energy in the world, with generation of 1,273 megawatts.


Chevron invests in emerging energy opportunities including solar projects, hydrogen projects, and bio-fuels products.

Revenue, Earnings, Cash Flow, and Metrics

Chevron’s growth was strong until 2009 when the effects from the global recession took a significant chunk out of the revenues and profits of all big oil companies. Oil prices have since rebounded, and Chevron’s earnings have rebounded as well.

Revenue Growth

Year Revenue
2010 $204.9 billion
2009 $171.6 billion
2008 $273.0 billion
2007 $220.9 billion
2006 $210.1 billion
2005 $198.2 billion

Revenue growth has been practically non-existent over this five year period, which included a large spike in oil prices followed by the financial crisis and global recession. Revenue over the past 12 months is up to $233 billion due to increased oil prices and improved refining operations.

Earnings Growth

Year EPS
2010 $9.48
2009 $5.24
2008 $11.67
2007 $8.77
2006 $7.80
2005 $6.54

Earnings have increased at a rate of 7.7% per year over this period. Over the trailing twelve month period, earnings are up to $11.45, which is a more than 20% increase over 2010.

Cash Flow Growth

Year Cash Flow
2010 $31.4 billion
2009 $19.4 billion
2008 $29.6 billion
2007 $25.0 billion
2006 $24.3 billion
2005 $20.1 billion

Cash flow growth has averaged over 9% annual growth over this period, although like revenue and EPS, the numbers have been erratic. Free cash flow is significantly lower than net income in a given year. For example, in 2010, FCF was only around $13 billion compared to more than $19 billion in net income.


Price to Earnings: 9.5
Price to Book: 1.9
Return on Equity: 21%


Chevron has increased its dividend every year for more than two decades, and currently offers a 2.96% dividend yield with a payout ratio of under 30%. As far as dividend stocks go, Chevron is among the more reliable ones.

Dividend Growth

Year Dividend
2010 $2.84
2009 $2.66
2008 $2.53
2007 $2.26
2006 $2.01
2005 $1.75

Chevron has grown its dividend by an average of 10% annually over this five-year time period.

In 2011, the company increased its quarterly payout from $0.72 to $0.78, and then in an atypical move, increased the dividend again after only two quarters to $0.81 per quarter.

Balance Sheet

Chevron has one of the strongest balance sheets among its peers with a total debt/equity ratio of only 0.10. The interest coverage ratio is very high, and goodwill is a negligible portion of the balance sheet.

Investment Thesis

When I published my last analysis of Chevron a year ago, the stock was in the low $80’s and I proposed that it was a good value. Now that the stock is nearly $110, I consider it to still be a reasonable investment, but not quite as appealing as it was a year ago. I no longer believe there is considerable upside in oil prices and economic improvement, so growth may no longer be boosted by rising oil prices, or at least not to the extent that they were last year.

Chevron has the strongest balance sheet in an industry primarily composed of strong balance sheets. Debt ratios are superior to its peers. Meanwhile, its valuation is fairly low in an industry full of fairly low valuations. It trades for a mild discount to XOM, which is likely due to earnings having greater volatility. Oil companies have historically had rather low valuations.

Chevron, like many of the above supermajors, has been continually growing its base of assets in spite of a problematic economy and low energy prices. The following chart shows the approximate growth in assets, liabilities, and consequently, equity.


Year Total Assets Total Liabilities Shareholder Equity
Current $201.717 billion $86.064 billion $115.653 billion
2010 $171.7 billion $72.1 billion $99.6 billion
2009 $164.6 billion $72.7 billion $91.9 billion
2008 $161.1 billion $74.5 billion $86.6 billion
2007 $148.8 billion $71.7 billion $77.1 billion
2006 $132.6 billion $63.7 billion $68.9 billion
2005 $125.8 billion $63.1 billion $62.7 billion

Shareholder Equity has grown by an average of over 10% annually over this period.

Liquid Natural Gas (LNG) plays a big role in Chevron’s business. Natural gas uses up a lot of volume per unit of energy, and this is acceptable for pipelines, but to transport it to places without pipeline access is not cost effective. Chevron and other companies can now compress it into liquid form, ship it anywhere they want via specialized insulated ships, and then return it to its gas form on arrival.

Energy companies like Chevron face a changing world. Their proven energy reserves are huge, but finite, and increasing environmental concerns and backlash, along with increasingly cost-efficient alternative energy solutions are significant trends to be aware of.

The company has several major projects and new energy findings. The full array can be read on Chevron’s site, but the most notable one to mention is the Gorgon Project, Chevron’s enormous LNG project which is expected to begin producing in 2014. This is a joint venture, of which Chevron is the project lead and holds the largest stake. The gas fields are estimated to contain 40 trillion cubic feet of natural gas, and the project lifetime is expected to last 50 years or so.


Every company has risks, and big oil companies certainly have their fair share of them. Chevron faces uncertainty in terms of currencies, geopolitics, litigation, and regulation. Litigation is an ever-present risk due to the large scale that a company like Chevron operates at and the drastic effect they have, some for better and some for worse, on communities around the world. I’ve personally known people from several countries that have described first hand the kind of damage the world’s insatiable desire for energy has caused their communities.

The primary risk is that of changing oil prices, which are outside of Chevron’s control and have the largest impact on their profitability. In addition, with rapid increases in the development and deployment of alternative energy sources as time unfolds, Chevron will have to continually invest in the most profitable energy production to remain competitive, and stay nimble despite its gargantuan size. BP reminded investors of yet another risk that is always present in this type of company: catastrophic failures. Chevron engages in deep-sea drilling, which is expensive and difficult technically to do successfully.

Conclusion and Valuation

In conclusion, I am neutral towards CVX stock at the current price of around $110, and I am holding my position. I expect the company to increase profitability over a fairly long period, to continue to increase shareholder equity and quarterly dividends, but not to the extent that it did last year. Although the valuation, with a P/E of under 10 looks attractive, when oil prices are fairly high, there’s the possibility of considerable downside if the world economy were to significantly decline.

If the stock valuation were to decrease, and the dividend yield were to increase to over 3.25%, I’d be potentially interested in purchasing more shares.

Full Disclosure: I own shares of CVX and XOM.
You can see my portfolio here.

Further reading:
Compass Minerals International (CMP) Dividend Stock Analysis
McDonald’s (MCD) Dividend Stock Analysis
Medtronic (MDT) Dividend Stock Analysis
Aflac (AFL) Dividend Stock Analysis
Walmart (WMT) Dividend Stock Analysis

Weekend Reading 10/29/2011

Dividend Stocks 101: The Essential Guide
If you’re new to the site, check out this key resource.

Abbott Is Splitting
Dividend Mantra discusses the split of Abbott, which is one of my portfolio holdings.

How To Use a Margin of Safety
Dividends For the Long Run discusses how to use a margin of safety when investing.

ROTH IRAs for Dividend Investors
Dividend Growth Investor posted an article on Roth IRAs and dividend stocks.

L3 Communications Analysis
Dividend Pig analyzed L3, and determined that the price is appealing.

Weekend Reading
Want more articles to read? Check out My Own Advisor’s list of links.

Compass Minerals International (CMP) Dividend Stock Analysis 2011


Compass Minerals is a large producer of salt and specialty fertilizer.

-Five year annualized revenue growth: 7.6%
-Five year annualized EPS growth: 36%
-Five year annualized dividend growth: 8%
-Current dividend yield: 2.47%
-Balance Sheet: Moderately Weak

Although I’m not of the opinion that CMP is a particularly strong buy at the current price, I think it’s a reasonable defensive selection.


Compass Minerals (NYSE: CMP) produces and sells salt and specialty fertilizers to countries around the world, although a large chunk of the sales occur in the US, Canada, and the UK. Deicing salt is mostly sold in the Great Lakes and Mid West regions of the US, and in the UK. Consumer and industrial salt is sold throughout the US and Canada. Specialty fertilizers are sold in western and southern US, and in Latin America, Japan, Australia, and New Zealand. Uses for salt include highway deicing, residential deicing, water conditioning, nutrition, dust control, and food preparation. The company has nearly 1,800 employees and a market capitalization of approximately $2.5 billion.

Sales breakdown

Highway Deicing: 48%
Consumer and Industrial: 33%
Specialty Potash Fertilizer: 18%
Records Management: 1%


Compass Minerals is the parent company of seven businesses:

North American Salt Company

Provides diversified salt products to customers throughout the United States.


Provides diversified salt products to customers throughout Canada.

Salt Union Ltd.

Provider of rock salt to customers throughout Britain to keep roads safe.

Great Salt Lake Minerals Corporation

Largest producer of sulfate of potash in North America.

Big Quill Resources

Canada’s largest producer of potassium sulphate.


Pristiva focuses on selling products to the salt water pool industry.

Deepstore Records Management

Deepstore is an interesting innovation of the company. Deepstore offers long-term document storage services in its old Winsford, England salt mine. In empty portions of their mine, the temperature and humidity is constant and free of pests, and so the company offers low-cost storage services.

Revenue, Earnings, Cash Flow, and Metrics

Revenue Growth

Year Sales
2010 $1,069 million
2009 $963 million
2008 $1,168 million
2007 $857 million
2006 $661 million
2005 $742 million

Over this five-year time period, Compass Minerals has grown revenue by approximately 7.6% per year, on average.

Earnings Growth

Year EPS
2010 $4.52
2009 $4.93
2008 $4.82
2007 $2.44
2006 $1.70
2005 $0.98

CMP has grown EPS by an average of 36% annually. Growth is going to be slower growing forward.

Operating Cash Flow Growth

Year Cash Flow
2010 $241 million
2009 $119 million
2008 $254 million
2007 $119 million
2006 $96 million
2005 $88 million

Cash flow growth averaged 22% annualized over this five year period.

The reason that EPS and cash flow alternate in recent years has to do with inventory. During some years, the company produces a lot more salt than it sells. This salt gets added to the inventory, and therefore increases earnings, but not cash flow. During the next year, they’ll sell this inventory (and not have to produce as much salt), and their earnings won’t be so great but their cash flow will be strong. This is common among companies, but the commodity nature of the salt business, as well as annual differences in winters, make this particularly significant for Compass.


Price to Earnings: 16
Price to Book: 5.8
Return on Equity: 44%


Compass Minerals currently has a dividend yield of 2.47% with an earnings payout ratio of approximately 40%.

Dividend Growth

Year Dividend
2011 $1.80
2010 $1.56
2009 $1.42
2008 $1.34
2007 $1.28
2006 $1.22

Compass Minerals has grown its dividend by an average of 8% annually over the past five years. The most recent increase, from 2010 to 2011, was 17%.

Balance Sheet

Compass Minerals has a moderately weak balance sheet. The total debt/equity ratio is 1.17, which is mediocre. The interest coverage ratio is less than five, which is not optimal. The good news is that the company is reducing its debt load over time. Long term debt decreased from a peak of $612 million in 2005 to $483 million at the current time. The annual interest payments decreased from a peak of $73 million in 2009 to $42 million over the trailing twelve month period. Prior to 2008, the company had negative equity. But over the last three years, from 2008 to 2010, total liabilities remained fairly static, changing only from $758 million to $767 million, while total assets increased from $823 million to $1,114 million. Shareholder equity (company book value), therefore increased from $65 million in 2008 to nearly $350 million in 2010. Equity is up to $413 according to the most recent quarterly report.

The short-winded summary of this is that the balance sheet is not particularly attractive, but it’s stable and improving.

Investment Thesis

Goderich Mine in Ontario, Canada is the largest underground rock salt mine in the world. Its current production capacity after a recent expansion is 9 million tons. The company also owns salt mines in Louisiana and the UK. Their mine in Winsford, England is the largest salt mine in that country. These enormous salt mines give Compass Minerals a competitive cost advantage in their markets. It is estimated that they still have several decades worth of salt mining available.

The company also operates mechanical evaporation sites to produce salt for industrial, agricultural, and commercial use. In addition, solar evaporation is used on the Great Salt Lake in Utah to produce sulfate of potash, magnesium chloride, and salt. Their solar evaporation facility is the largest solar salt production site in the US.

Salt producers submit blind bids to governments and other salt end-users, and the lowest bid typically wins. A significant part of the price of salt is the transportation cost, because salt is so cheap per unit of weight. Compass has access to water transportation over the Great Lakes, Mississippi River, and Ohio River, and their other facilities are close to rail networks, and so their transportation costs are low. The combination of having the largest production facilities in their markets, and efficient transportation locations, gives Compass Minerals a significant economic advantage that is impossible to replicate by competitors.

Sulfate of potash is used on high-yield crops, and carries a larger profit margin than commodity potash fertilizers. Compass Minerals is the largest producer of sulfate of potash in the United States. Growing populations and diminishing arable land is a combination that favors the potash industry. The company recently acquired Big Quill Resources, which expands their presence in this industry. In addition, by 2015, the company plans to have completed the second phase of a three phase expansion project of their Sulphate of Potash facilities.


A principle risk to Compass Minerals is the weather. A huge portion of business is dependent on cold, snowy winters that require a lot of salt on the highways. It’s also dependent on the seasonality and financial strength of its fertilizer buyers. In addition, Compass leases some of its locations, so it’s dependent on the availability of reasonable leasing conditions. The company also faces currency risk and is reliant on reasonable energy prices for its operations.

Conclusion and Valuation

In conclusion, I think Compass Minerals would make for a respectable diversified investment at the current price in the low $70’s, although the price isn’t ideal. A P/E of 16 isn’t bad, but for a company with this much debt and seasonality, I’d prefer a lower valuation for starting an investment. The fundamental economic moat of the company seems to keep the valuation up at this level, since risk-adjusted returns should be pretty solid.

Most portfolios consist of companies that face considerable economic risk, so CMP represents an interesting opportunity to cushion a portfolio from economic risk in return for taking on some weather-related risk. Salt is fairly resistant to economic issues while their smaller sulfate of potash segment is heavily affected by them. The dividend is moderately small but growing, and the payout ratio is low.

Full Disclosure: At the time of this writing, I hold no position in CMP.
You can see my portfolio here.

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