A Brief History of Chevron's Returns

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Despite constant attempts by analysts and the media to complicate the basics of investing, there are really only three ways a stock can create value for its shareholders:

  1. Dividends.
  2. Earnings growth.
  3. Changes in valuation multiples.

In this series, we drill down on one company's returns to see how each of those three has played a role over the past decade. Step on up, Chevron (NYS: CVX) .

Chevron shares returned 236% over the past decade. How'd they get there?

Dividends accounted for a lot of it. Without dividends, shares returned 140% over the last 10 years.

Earnings growth was terrific, driven largely by surging oil prices. Chevron's normalized earnings per share grew by an average of 12.7% a year from 2001 until today.

But that alone doesn't explain why Chevron's shares treated shareholders so well. Many other companies logged double-digit earnings growth over the decade and saw their shares go nowhere. The reason Chevron was such a boon to shareholders is explained by this chart:

anImage

Source: S&P Capital IQ.

Chevron shares were cheap 10 years ago, trading for less than 10 times earnings. That was a rarity back then -- coming off of the dot-com bubble, many large caps traded at preposterous valuations, which has stifled returns ever since. Few, however, wanted to own a boring company that pulled oil out of the ground like Chevron. That out-of-favor status kept valuations low, which allowed subsequent returns to be high. The same has been true for ExxonMobil (NYS: XOM) and ConocoPhillips (NYS: COP) , and it drives home one of the most important lessons in investing: starting valuations determine future returns.

Why is this stuff worth paying attention to? It's important to know not only how much a stock has returned, but where those returns came from. Sometimes earnings grow, but the market isn't willing to pay as much for those earnings. Sometimes earnings fall, but the market bids shares higher anyway. Sometimes both earnings and earnings multiples stay flat, but a company generates returns through dividends. Sometimes everything works together, and returns surge. Sometimes nothing works and they crash. All tell a different story about the state of a company. Not knowing why something happened can be just as dangerous as not knowing that something happened at all.

At the time this article was published Fool contributor Morgan Housel owns shares of Exxon. Follow him on Twitter @TMFHousel. Motley Fool newsletter services have recommended buying shares of Chevron. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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