Income Investors: You Can Still Play Oil's Rise
Chris is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Oil has had a nice run-up since it made a short-term trough in the 70s in late June. Long-term prospects for the commodity look strong, as rising demand from BRICS nations (especially Brazil and China), along with loose, inflationary monetary policy from the Fed could bolster its price.
However, I am skeptical of oil’s run in the short-term. While the economy is still recovering, the S&P 500 has made a strong run up to the 1,400 level, and I believe that the markets are due for a pullback – and oil will likely follow this pullback.
This opportunity provides investors with a great chance to scoop up some oil plays. Income investors and those already long may not want to buy more oil directly, whether by futures or ETFs. But oil stocks throwing off large dividends will do quite nicely. Especially since these dividend will only increase in yield as the share prices retreat – and then again in value as companies increase profits. Below are five oil-correlated securities that investors can use to boost their income.
British Petroleum (NYSE: BP) has made a strong recovery since its infamous oil spill. For one, executives decided to take the entire $41 billion charge of the spill in 2010, allowing the company to quickly return to profitability. And it did, turning 2010’s $3.3 billion loss into $26 billion in income in 2011.
BP also has plans for 12 exploration wells this year, four more than in 2011. In 2011, BP scoured nine countries to sign 55 exploration licenses. Exploration is risky but is perhaps the cheapest way to obtain new reserves. BP’s dividend is 4.6%, and it trades at 7.86 times this year’s earnings and 7.69 times next year’s estimate.
ConocoPhillips (NYSE: COP) and Chevron (NYSE: CVX) both had their fair share of troubles recently. ConocoPhillips polluted China’s Bohai Bay with 700 barrels of oil, while Chevron harassed Brazil with a few thousand barrels of its drilling mud, which is tainted by oil. ConocoPhillips is paying $100 million to fix the mess, and Chevron could pay up to $10 billion.
Now you know the bad side. Here is the good.
ConocoPhillips trades at a paltry 6.67 times earnings and 10.25 times next year’s estimates. Even more impressive, it spits out 4.7% in dividends. Chevron pays a lower dividend of 3.2%, but the company is also much safer, holding $19.77 billion in cash compared to $9.28 billion in debt. The firm trades at 8.37 times trailing earnings and 9.19 times next year’s estimate.
With a market cap over $408 billion, one of the world’s most valuable companies is Exxon Mobil Corporation (NYSE: XOM), which pays a 2.6% dividend and trades at 9.32 times earnings and 11.12 times next year’s projected income.
Exxon has net cash on its balance sheet of $2.22 billion, and the company had free cash flow (operating income less capital expenditures) last quarter of $11.44 billion, giving the company ample cash flow to meet its needs. While Exxon’s dividend is lower, the company is more adept than its peers at growing revenues.
Finally, Royal Dutch Shell (NYSE: RDS-A) looks like a good pick. The company hands investors a 4.7% dividend, 34% of earnings, and trades at 8.42 times this year’s earnings.
On the downside, Shell had a decrease of 3.5% in year-over-year quarterly revenue growth and a major 53.1% decline in year-over-year quarterly earnings. Moreover, the company holds a good deal of debt, holding $32.98 billion in debt and $17.28 in cash. Nonetheless, Shell still sports a book value per share of 56.4 and raked in $44.85 billion in cash flow from operations last quarter.
In conclusion, if the markets see a decline, oil is likely to follow. Even if the markets jump, oil could see a short-term pullback.
If either of these scenarios occur, investors can scoop up these dividend players for their tremendous income potential, and may see these dividends increased as the companies boost their payout along with earnings increases.
ChrisMarasco has no positions in the stocks mentioned above. The Motley Fool owns shares of ExxonMobil. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.