This Industry Produces Cash, Every Day, All Day Long
Vanina is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
There is no disputing that equities have been on a tear as governments and central banks take ever increasing measures to keep the global economy growing. Within the environment of quantitative easing, energy/oil & gas has lagged the overall markets. Part of the lag should be attributed to investors moving away from holding tangible assets that produce cash, every day, all day long. As price to earnings ratios grow and stimulus becomes expected, investors tend to disregard what is actually represented and owned when purchasing shares.
The large cap space of the energy/oil & gas industry provides the opportunity to own tangible assets that produce cash, every day, all day long. British Petroleum (NYSE: BP), Chevron Corporation (NYSE: CVX), and Exxon Mobil (NYSE: XOM) are three global leaders in this sector.
Exxon Mobil is the largest of the pack with a market cap of just under $400 billion. With an impressive ROE of 19.3%, Exxon Mobil certainly fits the standard of a company with a tangible business that produces cash, every day, all day long. The dividend yield of 2.86% remains the lowest of the three mentioned, but the long track record of paying and increasing its dividend makes the yield attractive.
Chevron is smaller than Exxon Mobil but still carries a market cap of over $240 billion. Chevron has been making large capital investments aimed to capture future growth, and is therefore in a position to outpace Exxon Mobil’s growth in the coming years. Even within their environment of aggressive investments, Chevron has managed to maintain a competitive dividend with a current yield of 3.34%.Their ROE has been driven substantially lower relative to Exxon Mobil’s partially as a result of Chevron’s larger capital investments. The lower ROE in this case is not indicative of a weaker business model. If you believe in the management team and that the recent capital investments will produce increasing long-term growth, then a currently lower ROE is a sign of a company poised for growth.
BP is the wildcard of the group. BP is the smallest of the three companies discussed and continues to carry a huge amount of headline risk dating to previous industrial accidents. The 4.91% yield is tempting but not worth the risk as any turn to the downside could be exasperated due to the current precarious public opinion.
Chevron provides plenty of yield and growth opportunities to remain or become a part of a portfolio looking for exposure to tangible assets along with a fair amount of equity beta. Portfolios looking to trim back some of their hard asset exposures such as real estate and commodities should also consider Chevron. The current yield is comparable to publicly traded real estate investment trusts. The capital gain portion of the total return should be less sensitive to interest rates, especially if they begin rising. Chevron should provide at least some of the inflation protection that an investor might be trying to gain exposure to through commodities. Exxon Mobil is another fine choice but is a clear second to Chevron. Don’t rush out to buy BP.
Vanina Egea 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!