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Friday, February 18, 2011

Dividend Yield, Growth, Safety and a Low Valuation................Need I say More

Chevron Corp. (CVX) is the second largest integrated energy company in the United States, and the world's fourth-largest oil company based on proven reserves. Yet in spite of its immense size, I believe this top quality company has plenty of opportunity to grow worldwide.

Chevron's balance sheet is strong and their cash balances exceeded their debt by over $5.6 billion at the end of 2010. Additionally, we are confident that their strong cash flow generation will allow them to continue to repurchase shares, aggressively invest in their future and continue to grow their dividend as they have for the past 23 years.

I believe that Chevron’s stock is undervalued with a PE ratio of just over ten times earnings, a debt to equity ratio of 10% and the dividend yield of 3%. Over the last decade, since the recession of 2001, Chevron has grown earnings per share by 8.8% per annum.

In contrast, the S&P 500, representing the average company, has only grown earnings at 4.9% per annum. Nevertheless, the current PE ratio of the S&P 500 is 15.6, which is approximately 50% higher than Chevron's PE of 10. Chevron has almost twice the growth rate, almost twice the dividend yield, a debt to equity ratio of 10 versus the S&P 500's 49, and yet ludicrously trades at a discount valuation to the index.

Disclosure I am Long CVX shares.

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