Why Chevron Is Worth Every Penny $CVX
Chevron scores fairly well on our business quality matrix. The firm has put up solid economic returns for shareholders during the past few years with relatively low volatility in its operating results. Return on invested capital (excluding goodwill) has averaged 13.4% during the past three years.The company looks fairly valued at this time. We expect the firm to trade within our fair value estimate range for the time being. If the firm’s share price fell below $88, we’d take a closer look.
Chevron’s cash flow generation and financial leverage aren’t much to speak of. The firm’s free cash flow margin has averaged about 3.7% during the past three years, lower than the mid-single-digit range we’d expect for cash cows. However, the firm’s cash flow should be sufficient to handle its low financial leverage.The firm’s share price performance has been roughly in line with that of the market during the past quarter. We’d expect the firm’s stock price to converge to our fair value estimate within the next three years, if our forecasts prove accurate.The firm sports a very nice dividend yield of 3.4%. We expect the firm to pay out about 28% of next year’s earnings to shareholders as dividends.
The best measure of a firm’s ability to create value for shareholders is expressed by comparing its return on invested capital (ROIC) with its weighted average cost of capital (WACC). The gap or difference between ROIC and WACC is called the firm’s economic profit spread.
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