Here's Why Chevron Corporation Deserves its Place on the Dow

The Dow Jones Industrial Average (DJINDICES: ^DJI  ) has been America's most-watched market index for decades, despite -- or perhaps because -- of its narrow focus on a mere 30 stocks. Where other indices might track 500, or 2,000, or even 5,000 different stocks, the Dow's steady focus on 30 business bellwethers has made it both easier to understand and easier to dismiss as a relic of simpler times. But as long as the Dow remains front and center in every day-to-day market analysis, it and its component companies will remain the most important barometers of American markets.

Source: Wikimedia Commons.

That's why it's important to understand not only the Dow, but its components as well. What do they do? What do they represent on the Dow, and why do they matter to the American economy? Where have they come from and where might they be heading in the future? Today we'll dig into the details of Chevron  (NYSE: CVX  ) to find answers to these questions and more, so that we can understand not just what moves the Dow, but why.

Chevron at a glance

  • Founded: Feb. 19, 1879 (as Pacific Coast Oil).
  • Joined the Dow: Feb. 19, 2008.
  • Current Dow weighting: 4.8% (sixth-largest weighting).
  • Replaced: Honeywell due to Honeywell's small size. 
  • Also a Dow component from: 1924 to 1925 and 1930 to 1999. 
  • Sector represented: Energy (oil and gas producers).
  • Rank (by revenue) among all energy stocks:
    • o 2nd (Fortune 500, oil and gas producers)
    • o 3rd (Fortune 500, overall)
    • o 9th (Forbes, ranking among all oil companies in the world by daily production)

Chevron has one of the most distinguished lineages of all Dow components, next to fellow former Baby Standard ExxonMobil (NYSE: XOM  ) . Both Chevron and ExxonMobil were integral parts of John D. Rockefeller's Standard Oil empire until its dissolution by antitrust decree in 1911, and Chevron -- first as Standard Oil of California and then under its current name following its 1984 acquisition of Gulf Oil -- has remained one of the world's largest and most powerful companies.

Not only was Chevron part of the most famous monopoly in history, it also created the world's most prolific oil producer, since it formed Aramco (now Saudi Aramco, which produces an estimated 12.5 million barrels of oil every day) in 1933 to tap the vast reserves beneath Saudi sands. Chevron is also closely linked to two of the most powerful oil gushers in American history -- the gusher at Spindletop, which single-handedly turned Texas into America's leading oil-producing state, and the Lakeview gusher in California, which remains the largest accidental oil spill in history over a century after it was finally stopped up.

Chevron is the eighth-largest company in America by market cap, the fifth-largest Dow component by market cap, and the second-largest publicly traded oil and gas company in the world by market cap, behind only ExxonMobil. It trails only 13 other companies globally by annual revenue (three are state-owned Chinese companies), but it's the eighth most-profitable company in the world. Getting oil out of the ground might not be as exciting as making the hottest tech gadget or the world's favorite blockbuster films, but it's been consistently (and hugely) profitable for Chevron for over 130 years.

Chevron by the numbers

CVX Chart

CVX data by YCharts.

  • Ten-year share price growth: 178%
  • Ten-year dividend growth: 168%
  • Total return (with dividends reinvested): 285%
  • Average P/E over the past decade: 9.3 
  • Current P/E premium over average P/E: 31%

CVX Revenue (TTM) Chart

CVX Revenue (TTM) data by YCharts.

  • Annualized revenue growth (past five years): 2.4%
  • Annualized EPS growth (past five years): 4.9%
  • Annualized free cash flow growth (past five years): N/A (negative FCF)
  • Change in profit margins (past five years): 22%

Chevron is suffering the same problems faced by most of its massive oil and gas peers -- there's only so much oil to pump out of the ground, and new sources have proven weaker in yield and costlier to extract than the gushers of the past. Despite these issues, Chevron has done an admirable job at tightening belts that need to be tightened, but it has also undoubtedly benefited from consistently high post-crash oil prices, which have (at least in the case of internationally priced Brent crude) generally stayed above $90 per barrel since early 2011. This has helped offset the dreaded production decline that became a reality this year, when Chevron reported a 2% year-over-year dip in daily output.

It shouldn't surprise longtime oil-patch watchers to see tepid analyst assessments for this oil supermajor -- Wall Street expects Chevron to grow at an average rate of just 5.5% per year for the next half-decade, which is well below the overall industry's expectation for annualized growth of 17% for the same period. However, even a slow-growing Chevron is a much better stock for the Dow than a rapidly rising small oil producer. After all, if America's second-largest oil and gas company isn't a meaningful representative of the energy industry, what is?

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