Don't Miss This Top Choice for Many Economic Scenarios
John is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
What prompted this idea was a dinner I had recently with a friend who disagrees with my macro outlook: he has a dire forecast for the world--worried about political instability and supply disruptions for oil in the Mideast.
So I asked him: Are you buying gold, a bunker, hoarding cash?? Nope..he said "I'm loading up on oil stocks."
I told my friend I share his optimism on oil stocks ...but because I'm optimistic about global growth and believe the stocks will benefit from rising oil demand while offering investors a cheap entry price and nice dividend. So I think he'll be right--for the wrong reason. That really got me thinking...
You Name the Macro Scenario, Oil Stocks Will Work
Could oil stocks be the ultimate win-in-almost-any-scenario all weather investment?? I think so.
If the global economy improves, oil demand will increase.. prompting higher oil prices and higher volumes. This is happening presently with oil prices rising slowly and steadily to the $96/barrel level.
If political instability in the Middle East prompts an economic slowdown due to oil supply disruptions, oil prices could potentially skyrocket..the scenario my friend envisions.
Boring, Chug-a-Long Scenario
And if the economies of the world just chug along in a low growth, low interest rate environment...investors will appreciate the higher than average/ higher than 10 year Treasury Yield Oil ETF dividend yields--and the allure of lower than average stock p-e's. There's a value appeal.
I like the iShares S&P Global Energy ETF because it offers a competitive, above market yield of 2.55%, a slightly below market trailing PE of 15, and an efficient 0.50% expense ratio. I also like having 50% of the fund in the safe confines of the US, with the other half of the fund seeking bargains in the rest of the world, notably some very cheap holdings in Europe.
Here are the Top ETF Holdings:
ExxonMobil (NYSE: XOM)...The largest publicly traded oil company with a long term record of superior return on capital and return OF capital to shareholders. Exxon has a AAA credit profile and gushes cash flow, allowing a 2.7% dividend payout and multi-billion buybacks per quarter. The legendary oil giant has been increasing its investments in alternative energy sources and is also heavily invested in the growth of natural gas...it super-sized its natural gas bet with the 2010 $41 billion XTO Energy acquisition.
Chevron (NYSE: CVX)...Like Exxon, Chevron is one of the largest intergrated energy companies in the world. It has invested heavily in oil and gas pipeline projects both present and future--and has a strong balance sheet. Chevron stands to benefit strongly from higher global energy consumption. Meantime, Chevron pays a high 3.3% dividend with a modest 9 PE. Chevron has shored up its solid balance sheet--divesting non core assets, including african marketing companies.. and is buying back $1 billion of stock per quarter.
BP (NYSE: BP)...We all know about the Gulf oil spill disaster. Its legacy lives in this stock price. Its pretty tough to find a large cap blue chip at 7 times earnings with a 5%+ dividend..so there's a lot of bad news built in to BP's stock price. BP has been selling what it deems to be non-core assets ever since the oil spill. BP hopes to create a smaller company with stronger growth, and importantly believes it has already reserved for the worst case liability scenarios stemming from the oil spill. BP sees a strong future with higher exploration activity and a continued readjustment of refining activities. But BP is challenged by declining revenues as it shrinks overall operations.
Royal Dutch Shell (NYSE: RDS-A)...Royal Dutch is another example of the deep value you'll find in Europe. One of the largest integrated oil and gas companies in the world, for sale at less than 8 times earnings with a comfortably payable 5% dividend. Royal Dutch plans to ramp up upstream exploration and production...growing annual worldwide production by 25% in the next 5 years. The company is also the world's 2nd largest natural gas producer. With business in 140 countries, Royal Dutch shell always faces political risks and investors worry about future returns on its high level of capital spending. But you're getting a safe blue chip stock while enjoying a near junk bond yield while waiting for appreciation.
Investing is all about risk vs. reward. Whether you see a synchronized global recovery or forecast global political chaos...whether you want a growth story or a value/income story....there's a strong case to be made for oil stocks.
And there's a psychic benefit: Each time you drive up to the local service station and see sky high prices that make you want to curse--you can take some joy in realizing at least some of the profits from those prices.
It may be time to drill down on the iShares S&P Global Energy ETF.
Grahdodd has no position in any stocks mentioned. The Motley Fool recommends 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!