Every investor, except pure technicians, must operate from some basic belief about the shape of things to come. In this regard, I believe that the US and world economies will gradually find their footings in 2009 and will regain their long-term growth trends.
The world's economies have made it through bubbles before, and we will do so again. As I have said before, I cannot offer chapter and verse how it will happen, but I remain convinced it will happen.
In light of this, for some weeks now, I have been thinking more and more about the other side of this valley. Who wins? What does it look like? How long does it take? I don't have many answers yet, but I do have one: When the world economy emerges from current recession, the energy crisis will be standing their waiting on us. For this reason, and because the big international oil stocks are very cheap, we have begun to nibble on selected oil stocks. Chevron is our first pick.
We like Chevron (CVX) because of its strong double-digit dividend growth over the last 5 years, and their success in finding new oil reserves.
The chart above shows our Dividend Valuation Model for CVX over the last 20 years. The stripped bar at the far right of the chart suggests that the fair value for CVX over the next 12 months may be near $100 per share. That would be a nice gain from its present value of $74.
In my mind, the only thing we need for CVX to reach that figure is if we see a bottom in the economy in the first half of 2009. That may seem overly optimistic, but since I said at the beginning that I believe a bottom will come in 2009, it does not require much convincing for me to think that we might see CVX at $100 per share over the next 12 months.
The chart at the right compares the yield on a 10-year US Treasury bond versus the dividend yield of CVX. In recent days, the dividend yield (shown in red) has pushed above the yield on a T-bond (blue line). This intersection is saying that the market now believes that CVX is over valued and is likely to cut its dividend to return to a more normal spread versus the T-Bond. I just don't agree with the market's logic here at all.
I believe the only way that that could happen is if the Obama Administration trashes the oil industry. That is not a good bet, especially in the next two -three years.
The author, clients, and employees of Donaldson Capital Management own CVX.