# Chevron Corp. (CVX)

## Dividend Discount Model (DDM)

Difficulty: Intermediate

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Dividends are the cleanest and most straightforward measure of cash flow because these are clearly cash flows that go directly to the investor.

### Intrinsic Stock Value (Valuation Summary)

Chevron Corp., dividends per share (DPS) forecast

USD \$

Year Value DPSt or Terminal value (TVt) Calculation Present value at 12.53%
0 DPS01 4.48
1 DPS1 4.50 = 4.48 × (1 + 0.54%) 4.00
2 DPS2 4.62 = 4.50 × (1 + 2.52%) 3.65
3 DPS3 4.83 = 4.62 × (1 + 4.49%) 3.39
4 DPS4 5.14 = 4.83 × (1 + 6.47%) 3.20
5 DPS5 5.57 = 5.14 × (1 + 8.44%) 3.09
5 Terminal value (TV5) 147.61 = 5.57 × (1 + 8.44%) ÷ (12.53%8.44%) 81.79
Intrinsic value of Chevron Corp.’s common stock (per share) \$99.12
Current share price \$118.71

Based on: 10-K (filing date: 2019-02-22).

1 DPS0 = Sum of last year dividends per share of Chevron Corp.’s common stock. See details »

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

### Required Rate of Return (r)

 Assumptions Rate of return on LT Treasury Composite1 RF 2.66% Expected rate of return on market portfolio2 E(RM) 12.02% Systematic risk (β) of Chevron Corp.’s common stock βCVX 1.06 Required rate of return on Chevron Corp.’s common stock3 rCVX 12.53%

1 Unweighted average of bid yields on all outstanding fixed-coupon U.S. Treasury bonds neither due or callable in less than 10 years (risk-free rate of return proxy).

Calculations

3 rCVX = RF + βCVX [E(RM) – RF]
= 2.66% + 1.06 [12.02%2.66%]
= 12.53%

### Dividend Growth Rate (g)

#### Dividend growth rate (g) implied by PRAT model

Chevron Corp., PRAT model

Average Dec 31, 2018 Dec 31, 2017 Dec 31, 2016 Dec 31, 2015 Dec 31, 2014
Selected Financial Data (USD \$ in millions)
Cash dividends 8,502  8,132  8,032  7,992  7,928
Net income (loss) attributable to Chevron Corporation 14,824  9,195  (497) 4,587  19,241
Sales and other operating revenues 158,902  134,674  110,215  129,925  200,494
Total assets 253,863  253,806  260,078  266,103  266,026
Total Chevron Corporation stockholders’ equity 154,554  148,124  145,556  152,716  155,028
Ratios
Retention rate1 0.43 0.12 -0.74 0.59
Profit margin2 9.33% 6.83% -0.45% 3.53% 9.60%
Asset turnover3 0.63 0.53 0.42 0.49 0.75
Financial leverage4 1.64 1.71 1.79 1.74 1.72
Averages
Retention rate 0.10
Profit margin 5.77%
Asset turnover 0.56
Financial leverage 1.72
Dividend growth rate (g)5 0.54%

Based on: 10-K (filing date: 2019-02-22), 10-K (filing date: 2018-02-22), 10-K (filing date: 2017-02-23), 10-K (filing date: 2016-02-25), 10-K (filing date: 2015-02-20).

2018 Calculations

1 Retention rate = (Net income (loss) attributable to Chevron Corporation – Cash dividends) ÷ Net income (loss) attributable to Chevron Corporation
= (14,8248,502) ÷ 14,824 = 0.43

2 Profit margin = 100 × Net income (loss) attributable to Chevron Corporation ÷ Sales and other operating revenues
= 100 × 14,824 ÷ 158,902 = 9.33%

3 Asset turnover = Sales and other operating revenues ÷ Total assets
= 158,902 ÷ 253,863 = 0.63

4 Financial leverage = Total assets ÷ Total Chevron Corporation stockholders’ equity
= 253,863 ÷ 154,554 = 1.64

5 g = Retention rate × Profit margin × Asset turnover × Financial leverage
= 0.10 × 5.77% × 0.56 × 1.72 = 0.54%

#### Dividend growth rate (g) implied by Gordon growth model

g = 100 × (P0 × rD0) ÷ (P0 + D0)
= 100 × (\$118.71 × 12.53% – \$4.48) ÷ (\$118.71 + \$4.48) = 8.44%

where:
P0 = current price of share of Chevron Corp.’s common stock
D0 = last year dividends per share of Chevron Corp.’s common stock
r = required rate of return on Chevron Corp.’s common stock

#### Dividend growth rate (g) forecast

Chevron Corp., H-model

Year Value gt
1 g1 0.54%
2 g2 2.52%
3 g3 4.49%
4 g4 6.47%
5 and thereafter g5 8.44%

where:
g1 is implied by PRAT model
g5 is implied by Gordon growth model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 0.54% + (8.44%0.54%) × (2 – 1) ÷ (5 – 1) = 2.52%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 0.54% + (8.44%0.54%) × (3 – 1) ÷ (5 – 1) = 4.49%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 0.54% + (8.44%0.54%) × (4 – 1) ÷ (5 – 1) = 6.47%