Calories or BTU's, Which Is Better for Your Retirement? BTU's

Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Foolish friend and fellow blogger, Matt Di Lallo, and I share a common concern over our retirements and income production therein.  We are not relying on Social Security.  This link explains why.  When looking for a retirement income investment, I look for three things: yield, dividend growth and safety.  Two companies that make compelling retirement investments are McDonald's (NYSE: MCD) and ExxonMobil (NYSE: XOM).  Matt and I will look at these companies with our respective opinions regarding these investments.

Energy Will Always Be Needed

While McDonald’s makes a compelling retirement investment, I think Exxon and its energy business has some advantages over the Golden Arches. For the foreseeable future, companies and consumers will use hydrocarbon based energy and Exxon is the largest publicly traded company in the energy business. It's the largest by market cap ($405 billion), largest by proven reserves of oil and gas (22 billion barrel equivalents), largest by production capacity (4.5 million barrel equivalents/d), largest by refining capacity (6.3 million b/d), and largest by natural gas production (13.2 bcf/yr).  Compared to competitor Chevron (NYSE: CVX) for example, Exxon has excellent returns on equity (26.6% vs Chevron's 18.1%), assets (13.2% vs 10.6%) and investments (25.2% vs 16.8%).

As I see it, Exxon embodies investment safety.  Standard and Poors agrees, giving Exxon a AAA credit rating and a A+ quality rating.  And why not?  The company has $13 billion in cash and generates an average free cash flow of around $5 billion each fiscal quarter.  Current debt to equity comes in at 0.07.

What about dividend?  No sense investing in a company that’s not helping pay the bills.  Exxon’s current yield is 2.6%.  Better than most CD’s but not exactly jaw dropping either.  Dividend growth for the past five years has averaged 7.7%, well above the industry average of 4.1%.  More importantly, the payout ratio is relatively low, in the low 20% range.  This gives Exxon flexibility to increase its dividend even in bad times. For example, in 2009, earnings went from $8.64 to $4.36 per share.  The dividend?  Rose from $1.55 to $1.66 per share, a 7% gain.

Exxon’s Future?

Exxon operates three basic businesses: energy production, refining and distribution and chemicals.

The chemicals division is one of the largest producer of olefins, the building blocks for many plastics and synthetic rubbers.  Exxon also is a major producer of benzene, another raw material for plastics and synthetic materials.  Exxon chemicals also happens to manufacture hydraulic fracturing fluid.  The company claims its Escaid PathFrac fluid is environmentally safe by virtue of very low aromatic compound content.  No word on if any Exxon executive has actually drank the stuff like some other company CEO’s, but its good to see Exxon competing in this way.

Exxon’s refining operations span the globe and holds the top spot for world refining capacity.  In addition to producing gasoline and other fuels, the company claims to be the top supplier of lubricant basestocks and the top marketer of finished lubricants.  Even better, Exxon is slowly expanding its refinery capacity each year.

Upstream production capacity is the focus of Exxon’s continued success and Exxon is expanding its capacity through acquisitions, new discoveries and joint ventures with overseas partners.  In October 2012, Exxon announced its purchase of Celtic Exploration, giving Exxon increased exposure to Canadian oil shale. Exxon also announced a significant oil find in the Gulf of Mexico, the largest new find there in 10 years.  Lastly, Exxon recently announced a 30% stake in a joint venture with Russia’s Rosneft to explore the Bazhenov oil shale in western Siberia.  This Bazhenov shale is estimated to be 80 times the size of the Bakken oil shale in North America.  On top of all this, the company claims to have 120 exploration projects in various stages of development and production.

What’s Wrong With McDonald’s?

Don’t get me wrong, I like McDonald's and even have a small position in it.  The dividend is higher and Micky D’s tends to have a higher dividend growth rate.  My concern is the impact the Affordable Care Act will have. Fast food is a labor intensive business and having to provide additional expensive health care benefits will degrade future earnings and dividends. McDonald’s also has some significant competition.  If consumer dining habits shift, McDonald’s could lose market share and with it, earnings and dividend growth.  On the other hand, McDonald's has some significant virtues and Matt spells them out here.

Foolish Final Thoughts

In my opinion, Exxon represents a classic blue chip company that you buy and hold for your retirement income.  If you assume dividend growth will continue at 7.7% a year and if you re-invest the dividends, I calculate in 15 years you will generate $557 of income for every $1000 invested today.  Buy Exxon in your Roth IRA and that becomes tax free income.  

Given the size of the company and the future need for petroleum based products, I don’t see Exxon following General Motors (NYSE: GM) into bankruptcy or General Electric (NYSE: GE) in a major dividend cut.  General Motors suffered for its labor costs, declining market share and limited cash during the Great Recession.  General Electric paid the price for being in the real estate market, via GE Capital, during a major housing bubble that burst in spectacular fashion.  To help save itself, GE's dividend was cut from $1.24 per share in 2008 to $0.61 in 2009, and $0.42 in 2010. 

I just don't see Exxon with these sorts of problems.  Exxon earnings took a hit during the recession but muddled through, it has cash on hand, and currently, energy cannot be described as a bubble.  Right now, I see Exxon just producing oil products and returns for its investors.

dylan588 owns shares of McDonald's. The Motley Fool owns shares of General Electric Company, McDonald's, and ExxonMobil. Motley Fool newsletter services recommend Chevron, General Motors Company, and McDonald's. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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