The Bluest of the Blue Chips
Greg is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Blue chips are well-established, financially sound companies with products that almost everyone loves. Investing in blue chip companies and reinvesting the dividends is a strategy that can provide reliable, market beating returns over the long term.
A blue chip myth
A myth regarding blue chip companies is that their days of growth are over and that an investor can only achieve minimal returns by investing in them.
While this may be true with some large cap companies, it is definitely not true with a majority of blue chip companies. Companies that I consider to be the "Bluest of the Blue" have the ability to sustain significant growth and provide exceptional shareholder returns over the long term due to their great brands, innovation, and effective leadership.
Every company will have difficult periods at some point, but blue chip companies typically have the resources and popularity that is required to attract top of the line executives and CEO's that can right the ship and effectively guide the company back to greatness when things are not going as planned.
Qualities to look for in blue chip companies
Look for the following traits in order to invest in the best blue chip companies that will stand the test of time:
- Great brands that almost everyone loves
- Products that are in demand whether the economy is booming or in a recession
- A diverse group of products/services
- Global operations
- Successful financials
- A significant and growing dividend
The Bluest of the Blue!
There are a handful of blue chip companies that I consider to be the "Bluest of the Blue." This group of companies has all of the traits listed above and can be confidently bought and held over the long term. I plan on releasing a series of articles detailing each company out of my "Bluest of the Blue" group of companies. The first company I am highlighting is Chevron (NYSE: CVX), which is one of my favorite "Bluest of the Blue" companies.
Energy is a vital component of society and Chevron is involved in every aspect of the energy marketplace, including oil/natural gas exploration and production, oil refining, gasoline sales, energy marketing/trading, pipelines, coal mining, power generation, and petrochemicals. Chevron is one of the most trusted energy brands in existence and operates globally.
Chevron achieved an exploration success rate of 74% in 2012, which greatly exceeds its 10-year average of 54%. In addition, Chevron has made a large number of significant long-term investments that should boost earnings in upcoming years. One example is the construction of a lubricants facility at its Pascagoula, Mississippi refinery, which is projected to make Chevron the worlds largest producer of premium oil products.
Chevron's financial progress has been steady, with net income increasing from $7.2 billion to $26.2 billion over the last decade. Not surprisingly, Chevron's earnings took a hit during the great recession, but recovered nicely.
A fabulous dividend!
A common characteristic of my "Bluest of the Blue" group of companies is an excellent dividend history, and Chevron has one of the best! Its dividend has almost tripled over the last decade, resulting in a current yield of 3.2%. Considering Chevron's low payout ratio of 30%, I believe that its generous and impressive dividend increases will continue well into the future.
Chevron is currently trading near its all time high, but its price to earnings ratio, or P/E, is only 9.3. ExxonMobil (NYSE: XOM), in comparison, has a slightly higher P/E of 9.5 and a dividend yield of 2.7%.
ExxonMobil, also a well respected blue chip, is one of the largest companies in the world with a market cap of $415 billion. ExxonMobil is the world's largest refiner and marketer of petroleum products and its global businesses include one of the world's largest petrochemical operations.
Both Chevron and ExxonMobil are good investment choices, but my personal preference is Chevron, due to its higher dividend yield. Also, Chevron is about half of the size of Exxon and has more room for growth.
Another competitor is Valero Energy (NYSE: VLO). Valero owns and operates 16 petroleum refineries, 10 ethanol plants, and a 50-megawatt wind farm. Its products are marketed in 7300 retail centers in the U.S., Canada, the Caribbean, the United Kingdom, and Ireland. Valero's products include gasoline, lubricants, petrochemicals, and asphalt.
Valero only operates in the downstream energy marketplace and must purchase oil for its refineries. Diversified companies such as Chevron have an advantage over Valero, since they produce their own oil, resulting in a lower operating cost in the refining process.
During a booming economy, Valero typically performs well. However, it lacks Chevron's diversity, which was evident during Valero's significant losses during the great recession.
The Foolish bottom line
Energy is required in almost every aspect of our lives. As the economy improves and the global population continues to increase, the demand for energy should rise significantly. As a result, I believe that energy is a great sector to invest in and that every investor should have exposure to it. Due to its diverse operations, attractive dividend, and impressive long term growth, I am establishing Chevron as my first "Bluest of the Blue" recommendation!
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Greg Williamson owns shares of Chevron. 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!