Dividend Aristocrats: Time to Buy Chevron?

If you are looking for stocks that are going to continually generate returns for many years to come, dividend aristocrat stocks is a good place to start looking. By just about every measure, Chevron (CVX 1.04%) fits the bill. Its long tenured history of returning capital to shareholders through dividends makes it a wonderful wealth-generating machine ... if you buy at the right time. Let's take a quick look at what makes this high-society group of stocks so special, why Chevron deserves to be among them, and whether Chevron can continue to stay in this elite group worthy of your investment today. 

A different kind of stock: dividend aristocrats
Almost any company can pay a dividend as long as it has a little excess cash lying around after maintaining and growing the business, but sustaining that over a long period of time is another story. That's where dividend aristocrats separate themselves from the rest. To qualify for the title dividend aristocrat, a company needs to not only pay a dividend, but steadily increase that dividend payment over a period of 25 years or more. Of all the companies publicly traded on the U.S. exchanges, only 51 of them qualify to be dividend aristocrats.

Those who are really stingy about the definition of dividend aristocrat might disqualify Chevron because in the past 25 years it has had a couple times where dividends didn't increase over more than four quarters. However, if you are willing to overlook the fact, then you will find a company that has either maintained or increased its dividend since prior to 1970 and has seen the dividend grow by 613% in the past 25 years. That's nothing to scoff at.

CVX Dividend data by YCharts

Is Chevron worth buying today?
Just like its integrated oil and gas peer ExxonMobil -- also a dividend aristocrat -- Chevron has a few features that make it look very attractive as an investment. Global energy demand over the next several decades will come close to doubling from where it is today, and it's likely that oil and natural gas will remain a major component of that energy mix as more and more people around the world increase their living standards.

Source: U.S. Energy Information Administration

To meet this global demand, Chevron has a large portfolio of development projects to increase its total production. Just between now and 2017, the company expects to increase its production by 500,000 barrels of oil equivalent, or about 19% more than today's production. With demand increasing and growing output from the production side of the business, Chevron should see a large uptick in earnings over the next several years. 

Source: Chevron Investor Presentation

On top of that, Chevron has been one of the best performers in the space at generating returns on capital. Over the past five years, only ExxonMobil has been able to post a better average return on capital employed.

Source: ExxonMobil Investor Presentation

If you were to look at Chevron's stock price over the past few years, though, these things might not be reflected. After all, in the past three years Chevron -- and all of its peers -- have underperformed pretty significantly in comparison to the S&P 500 on a total return basis, which includes dividends.

CVX Total Return Price data by YCharts

To be fair to these companies, all have dumped loads of money back into the business for several mega-projects that have price tags of greater than $10 billion that have not yet come online. In fact, Chevron estimates that about 40% of its invested capital is in preproductive assets. 

Source: Chevron Investor Presentation

Once many of those projects come online and Chevron can get back to its target range of about 33% preproductive capital, it could result in a significant bump in returns.

There is one other important aspect when it comes to buying shares of Chevron: the price. While buying shares of Chevron is probably considered a "safe" investment, someone who buys shares at the wrong time when the company is overvalued will likely see less than stellar returns. If we compare Chevron to its 10-year average valuation, the company doesn't look that cheap except by maybe its price to tangible book value metric, which could be related to all of those preproductive assets.

Source: S&P Capital IQ

What a Fool believes
If you were to go out and buy shares of Chevron today, it would be hard to call it a bad decision. The company does look a little overvalued compared to its historical valuations, but that may just be a precursor to all of those new projects slated to come online soon. With a long tenured history of paying dividends and a yield of 3.4% -- one of the best among the dividend aristocrats -- Chevron is certainly one worth keeping a close eye on for when Mr. Market goes on one of its irrational price drops and shares go on a nice discount, because picking up shares at one of those times can be a major wealth-building opportunity.