DRIP Candidate Winner: Chevron

The third battle for DRIP Portfolio inclusion pitted the undersized but wily Midwestern chemical company Lubrizol (NYSE: LZ  ) against global integrated oil powerhouse Chevron (NYSE: CVX  ) . While not quite of David/Goliath or Douglas/Tyson proportions, we didn't have skin in the game in either of those epic bouts.

Hitting the mat in the final round was Lubrizol, leaving Chevron standing victorious. While we certainly admire how the top brass has molded and run Lubrizol, we're just more excited about Chevron's prospects when we think many years out.

Prospects/Growth (edge Chevron): Lubrizol may have higher growth potential, but we believe that Chevron has longer earnings growth sustainability given its wide economic moat and scale. Chevron will profit as long as oil and natural gas play a role in the global economy, and despite our hopes for cleaner energy sources, we think oil and gas are here to stay for some time.

Execution (edge Lubrizol): We admire Lubrizol's commitment to research and development (consistently around 5% of sales) and its focus on earning acceptable returns on capital. Five straight years of increased ROIC, a strengthened balance sheet, and record 2009 profits are the result of the company's focus on execution.

Stewardship (edge Lubrizol): Top brass at Lubrizol showed they are serious about putting shareholders first. The company has recently reduced all director terms to one year, adopted majority voting rules even in uncontested director elections, repealed pesky change in control provisions, and eliminated tax gross-ups. Add this to a compensation policy based 50% on ROIC and growth initiatives and Lubrizol DRIPpers should be able to sleep comfortably at night knowing their investment is in well-aligned hands.

Risks (edge Chevron): Big oil will always have significant political risks stemming from natural disasters or nationalization of assets in unstable countries. Fortunately, these risks have been a part of the oil business for more than a century and should thus be already appreciated by the market. Lubrizol, on the other hand, has more unknown risks and uncertainties associated with its business.

Valuation (edge Chevron): Chevron shares have ticked up a bit, from $73 to $77 since I (Todd) originally wrote about the stock, but I'm still comfortable paying up to $80 a share, which is near the upper range of my dividend discount model valuation. On a relative valuation basis, Chevron shares also look attractive versus its main competitors:

Company

Enterprise Value-to-EBITDA

Forward P/E

Consensus Long-Term EPS Growth

Chevron

3.83

7.9

13.8%

ExxonMobil (NYSE: XOM  )

5.68

9.1

12.1%

ConocoPhillips (NYSE: COP  )

3.94

7.8

13.1%

Source: Capital IQ (a division of Standard and Poor's) and Thomson.
EBITDA = earnings before interest, taxes, depreciation, and amortization.

Bottom line: Chevron edged out Lubrizol 3-2.

DRIP details
To begin your Direct Stock Purchase (DSP) / DRIP investment in Chevron, Click on the "Stock Purchase" link on this webpage to be directed to information on the direct stock purchase and dividend reinvestment programs. Be sure to read the plan's prospectus, which outlines all the fees and costs, carefully!

Among other things, you'll want to note:

  1. The minimum initial purchase is $250; after that it's at least $50 per investment.
  2. You can choose to reinvest all, or just a portion of the dividends you are paid. Plus, there's no fee for reinvestment if you own less than 200 shares.
  3. If you make additional purchases, the fee is $2.00 per transaction and $0.05 per share. So if you bought 10 additional shares, it would cost $2.50 ($2.00 + $0.50).
  4. You'll get a statement after each dividend is paid, or you can view your account online.

Once you've reviewed the prospectus, follow the step-by-step instructions to invest online.

The Fool's fantastic disclosure policy makes us wait at least 10 days before purchasing our own shares. We'll let you know when we've made our transaction.

On that note, our initial investment in Microsoft is complete. Here's how our real-money DRIP port stands today:

Company

Shares Held

Average Price Paid

Price Today

Gain/(Loss)

Microsoft

20.16

$24.60

$24.08

(2.1%)

If you haven't already done so, follow us on Twitter to be alerted when we make DRIP Portfolio announcements, and bookmark our homepage to view all of our past commentaries.

Todd and Bryan own shares of Microsoft and they will soon be owners of Chevron via their shiny, new DSP/DRIP accounts! Microsoft is a Motley Fool Inside Value recommendation. Chevron is a Motley Fool Income Investor recommendation. Motley Fool Options has recommended a diagonal call position on Microsoft. The Fool owns shares of ExxonMobil and Microsoft. Try any of our Foolish newsletter services free for 30 days.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community. The Motley Fool has a disclosure policy.


Read/Post Comments (4) | Recommend This Article (11)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 10, 2010, at 7:32 AM, TMF42 wrote:

    Hey DRIP Fools!

    First Microsoft (Nasdaq: MSFT) and now Chevron (NYSE: CVX) -- I like where the drip port is headed.

    Let Todd or I know if you've got any qeustions.

    Bryan

    TMF42

  • Report this Comment On September 23, 2010, at 4:23 PM, btinter1 wrote:

    Bryan or Todd,

    First let me thank-you for starting this portfolio.

    This is exactly what i've been looking for.

    I do have a question about the DRIP investing though. I am currently with Interactive Brokers and i can buy from 1-200 hundred shares for 1 dollar. It seems to me that this is as cheap if not cheaper than the fee's for most of the DRIP plans and I'll have more control when re-investing the dividend payouts or when selling if need be.

    Any advice or comments on me following along with your portfolio but doing it through a very low cost broker would be greatly apprecitated.

    Thank-you,

    Mike

  • Report this Comment On October 20, 2010, at 11:58 AM, TMF42 wrote:

    Mike,

    Sorry I haven't responded sooner - just saw this now!

    The deal you are getting seems pretty great, and yes, is probably cheaper even in the long run. But DRIP investing is about more than just low fees (though that is certainly a big part of its allure).

    Reinvesting dividends throughout a market cycle builds a long-term mindset and keeps you from worrying about getting in at lows and out at highs. Plus, it is a fool-proof way to make sure you continue to save and invest. Very Foolish.

    So I've got two recs that you may find helpful.

    1. You may be able to enroll in dividend reinvestment through your broker. Maybe. If you don't plan on adding capital to your position very often, it may be worth buying the shares in your brokerage account and then moving them into the Company's DRIP plan.

    2. If you want to build the DRIP mentality, but maintain the good deal in your brokerage account, you can probably set up an automatic investment plan, where you can have $50 or $500 taken from your checking account and automatically put in your brokerage account to buy more shares. Setting it up quarterly would effectively create the DRIP mentality.

    If you want to catch up on previous articles, we keep a list of them here: http://wiki.fool.com/Fool_DRIP_Portfolio

    Best,

    Bryan

    TMF42

  • Report this Comment On December 16, 2012, at 1:00 AM, dyw0614 wrote:

    Hi Tom, or Bryan,

    I'm new at DRIPs but have been reading and learning about them for a little bit now. I still haven't found a safe place to purchase some...

    Am I able to purchase them through the company themselves with no broker? Or purchase them through a online trading source?

    Advice would be greatly appreciated!

    Duke

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