Run With the Bulls With Vanguard’s Top Picks

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

Vanguard invests in large-cap stocks. It follows the principle of high returns and low expenses for investors. In January, it reached assets under management worth $2 trillion. Last year, Vanguard faced certain headwinds due to the U.S debt crisis, rises in the unemployment rate, and Eurozone turmoil. Still, this year Vanguard amassed huge assets under management, which shows investors’ confidence in Vanguard. I have selected Vanguard's top three holdings as of March 31, 2013 to dig deeper into:

<table> <thead> <tr><th> <p><strong>Name of Companies</strong></p> </th><th> <p><strong>Percentage in Holdings</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>ExxonMobil <span class="ticker" data-id="206209">(NYSE: <a href="http://caps.fool.com/Ticker/XOM.aspx">XOM</a>)</span></strong></p> </td> <td> <p>2.18%<strong></strong></p> </td> </tr> <tr> <td> <p><strong>Apple <span class="ticker" data-id="202686">(NASDAQ: <a href="http://caps.fool.com/Ticker/AAPL.aspx">AAPL</a>)</span></strong></p> </td> <td> <p>2.1%</p> </td> </tr> <tr> <td> <p><strong>Chevron Corporation <span class="ticker" data-id="203255">(NYSE: <a href="http://caps.fool.com/Ticker/CVX.aspx">CVX</a>)</span></strong></p> </td> <td> <p>1.28%</p> </td> </tr> </tbody> </table>

These large-cap companies are betting on new projects and products for long-term growth. Lets’ find out for how long these strategies will prove profitable for these companies.

Gaining from big projects

Brazil had 14 billion barrels of oil reserves last year, which makes it the second largest oil reservoir in South America, with major oil production from the Campos Basin. Looking at the high oil production in the region, Chevron showed interest in the Papa Terra heavy oil field. The announcement of the Papa Terra plant first came in 2010, but production will start this year. The company holds 37.5% working interest in this project, which is around $5.2 billion.

Papa Terra is one of Chevron's major upstream projects. The upstream activities include searching for underground oil and gas fields, drilling wells, and transporting this oil and gas to the surface. The project has a first of its kind tension leg well platform. This tension leg well is used for production of oil and gas offshore, and is suitable for water depths of more than 300 meters, and is the company’s largest investment in Brazil. In accordance with growth opportunities from this plant, the company's upstream activities segment's total production is expected to increase from 2.6 million barrels oil equivalent per day in 2012, to 2.78 million barrels oil equivalent per day in 2014.

Chevron recently announced its Angola upstream liquefied natural gas, or LNG, project started production. Construction started in 2008, with production commencing this year. The company has a 36.4% stake in this $10 billion project, which is expected to add 45.4 million cubic feet per day of natural gas to the current 4.74 billion cubic feet per day. The plant will help Chevron meet international growing demands, especially from China and India. Demand from China is expected to increase from 19.1 billion cubic meters per year in 2012, to 20.6 billion cubic meters per year in 2013. The demand from India is expected to rise from 14 million metric tons per annum to 25 million metric tons per annum in 2015.

Growth from both the above upstream projects has led the company to increase income expectations to:

<table> <thead> <tr><th> <p><strong>Year</strong></p> </th><th> <p><strong>2012</strong></p> </th><th> <p><strong>2013</strong></p> </th><th> <p><strong>2014</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Income</strong></p> </td> <td> <p>$21.78 billion</p> </td> <td> <p>$22.48 billion</p> </td> <td> <p>$22.68 billion</p> </td> </tr> </tbody> </table>

Growing project leading to pay healthy dividend

ExxonMobil recently started production at its Kearl oil sand project, which includes innovative technology to improve environmental performance and meet future energy demands. The project is forecasted to produce 110,000 barrels per day in the later part of 2013, and is expected to double by 2015. The Alberta based project costs around $12.27 billion, and Exxon has 30% stake in it.

Kearl oil sand will produce bitumen using proprietary froth technology, that doesn’t require frequent upgrade of bitumen on-site and hence saves a multi-billion dollar investment. It will also reduce the carbon emissions generated during the upgrade process. The company expects revenue generation of $1.5 billion in 2013 and $2.25 billion in 2014 from the Kearl oil sand project.

Exxon has continuously increased its dividend over the past 30 consecutive years. The company has declared dividend of $0.63 per share in the first-quarter of 2013, 10.5% higher from last quarter. Exxon had a free cash flow of $3.54 billion, on March 31, 2013, up from $575 million in December 2012. With the rising revenue opportunity, Exxon will generate increased cash flow in the future. Dividend are expected to be:

<table> <thead> <tr><th> <p><strong>Years</strong></p> </th><th> <p><strong>2012</strong></p> </th><th> <p><strong>2013</strong></p> </th><th> <p><strong>2014</strong></p> </th><th> <p><strong>2015</strong></p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Dividend</strong></p> </td> <td> <p>$2.18</p> </td> <td> <p>$2.46</p> </td> <td> <p>$2.61</p> </td> <td> <p>$2.75</p> </td> </tr> </tbody> </table>

Fresh growth from fresh market

iPhone sales dramatically increased around 400% in last few months in India. China saw increase in shipments of 211% year-over-year in the first-quarter of 2013. Seeing the growth potential from these regions, Apple is expected to launch a ‘cheaper’ version of the iPhone in September 2013. It is expected to cost around $199. According to Internet trends, the number of smartphones users will grow to 52% year-over-year to 67 million by the end of this year in India. China is forecasted to have 354 million users in 2013, a year-over-year growth of 31%. Owing to growth in developing markets, sale of the ‘cheaper’ iPhone units are expected be as follows:

<table> <thead> <tr><th> <p><strong>Year</strong></p> </th><th> <p>2013</p> </th><th> <p>2014</p> </th><th> <p>2015</p> </th></tr> </thead> <tbody> <tr> <td> <p><strong>Estimated </strong><strong>Number of iPhone units in developing markets</strong></p> </td> <td> <p>37 million</p> </td> <td> <p>96 million</p> </td> <td> <p>170 million</p> </td> </tr> </tbody> </table>

iPhone generated revenue of $22.95 billion in the second-quarter of 2013, lower than first-quarter revenue of $30.66 billion due to market encroachment by Samsung Galaxy S4. In order to register growth in iPhones, Apple has updated iPhone’s operating system to iOS 7 which includes new features like iTunes Radio. iTunes Radio is an internet based service first launched in the U.S. and will allow the user selection from over 200 radio stations. Apple holds more than 575 million iTunes accounts on its App Store and it registered sales growth of $1.9 billion in the second quarter of 2012 to $2.4 billion in the second quarter of 2013. iPhone expects revenue growth of 27% from the second quarter of 2012 to reach $28.8 billion in the first quarter of 2014.

Conclusion:

Chevron anticipates growth from its two big projects, Angola LNG project for the increasing demands from China and India and Papa Terra in Brazil, while ExxonMobil announced commencement of production at its Kearl oil sand. The company expects to generate high cash flow from this project, which will be distributed as dividend.

Apple has high hopes from the emerging markets like India and China for its iPhone. All the three companies have growing future prospects, therefore I recommend a buy.

More from the Motley Fool

If you're on the lookout for some currently intriguing energy plays, check out The Motley Fool's "3 Stocks for $100 Oil." For FREE access to this special report, simply click here now.


Shweta Dubey has no position in any stocks mentioned. The Motley Fool recommends Apple and Chevron. The Motley Fool owns shares of Apple. 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!

blog comments powered by Disqus