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Using a Value Line Report: Chevron’s Ecuador Headache – June 8, 2012
Dow Industrial Composite member Chevron (CVX – Free Chevron Stock Report) recently published a news release that said, “The Ecuador judgment is a product of bribery, fraud, and it is illegitimate. The company does not believe that the Ecuador judgment is enforceable in any court that observes the rule of law. If the plaintiffs' lawyers believed in the integrity of their judgment, they would be seeking enforcement in the United States – where Chevron Corporation resides.”
Those are pretty strong words, but then Ecuador is seeking billions of dollars in damages from the oil giant that Chevron doesn’t believe it owes in a highly disputed legal case filled with enough twists and turns to fill a spy novel (or a soap opera, since some of the events boarder on the comic). It would seem that management has a reason to be upset based on the facts of the case, which Chevron devotes a page to on its homepage. Unfortunately for Chevron, the fact that this case won’t die means that it has to keep dealing with the public bashing the case has unleashed—regardless of whether the negative publicity is justified or unjustified.
That said, shareholders and interested investors shouldn’t be too concerned about the case or the publicity. Chevron is the model of health and appears to have a relatively bright future. For starters, Chevron earns Value Line’s Highest Safety rank (1), found in the Ranks box.
A rank for Safety is assigned by Value Line to each of the approximately 1,700 stocks reviewed in The Value Line Investment Survey. This rank measures the total risk of a stock relative to the approximately 1,700 other issues under our coverage. Stocks with high Safety ranks are often associated with large, financially sound companies; stocks with low Safety ranks are typically associated with companies that are smaller, have weaker-than-average finances, or, in some instances, a combination of small size and weak finances. Safety becomes particularly important in periods of stock market downswings, when many investors want to try to limit their losses.
The record of Safety over the years is impressive in the periods when the market is trading lower. This is to say that stocks with high Safety ranks generally fall less than the market as a whole when stock prices drop. For example, between June 2008 and March 2009, Rank 1 Safety stocks, as a group, fell 32.5%, while Rank 3 (Average) stocks dropped 53.2% and Rank 5 (Lowest) stocks fell 67%. While no one likes to lose money, the nearly 20-percentage-point difference between the Highest ranked and the Average-ranked group is material, and don’t forget that the Lowest ranked stocks, as a group, fell more than twice as far as the Safety rank 1 group. In today’s volatile market, Chevron’s Safety rank of 1 is a notable investment feature.
Looking at the oil giant’s finances a little more closely, the Capital Structure box shows that as of March debt made up only 7% of this nearly $200 billion market cap company’s capital structure. Moreover, the Current Position box shows that it had almost $20 billion in cash on the balance sheet—more than the sum that Ecuador is seeking, by the way. Even if Chevron winds up paying Ecuador to end what the international oil giant obviously considers a fraudulent lawsuit, it should be able to handle the cost without missing a beat.
The future also looks bright for this industry giant. Recent corporate performance and share price movements have resulted in a Timeliness rank of 2, Above Average (this information is found in the Ranks box). The Value Line Timeliness Rank measures probable relative price performance of the approximately 1,700 stocks under our review during the next six to 12 months. As a group, stocks ranked 1 or 2 are expected to outperform stocks ranked lower on the 1 to 5 Timeliness scale. So, Value Line’s proprietary and statistically driven Ranking System gives Chevron high marks over the next year or so.
Value Line analyst Jeremy Butler also sees good things over the next three to five years. Butler’s long-term projections call for Chevron to earn about $17.00 per share and pay out about $5.00 in dividends over the 2015 to 2017 timeframe. This translates to a price target of between $130 and $160 a share, an advance of between 30% and 60% from recent prices. Adding in the company’s generous dividend, the annualized total return over the same span is expected to be between 10% and 15%; an impressive gain for a company as large as Chevron. (These figures can be found in the Projections box.)
Income investors should note that Butler is anticipating annualized dividend increases of almost 10%. That figure is about three times the historical average inflation rate. Moreover, with a recent yield of 3.6%, Chevron’s dividend yield is well more than the median dividend yield of dividend paying stocks under Value Line’s review. (This figure is published weekly online and on the cover of the Index section of The Value Line Investment Survey.) Chevron’s dividend yield is also toward the high end of its historical range, which, as can be seen in the historical portion of the Statistical Array, is between 2.7% and 4.0%.
The negative publicity surrounding Chevron’s Ecuador headache can be disturbing at times. However, Chevron is a financially solid company with what appears to be bright prospects. Investors, particularly those in pursuit of dividend paying companies, should strongly consider this oil giant for their portfolios.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.