Technology has increasingly represented the broader market. So much so that investors may be overlooking the energy that remains the ultimate foundation for the global economy. Integrated oil and natural gas giants ExxonMobil (NYSE:XOM) And Chevron (NYSE:CVX) have endured the ups and downs of the energy industry for decades.
These companies explore and refine crude oil and natural gas, but thrive in times of high commodity prices. ExxonMobil and Chevron have the ingredients that buy-and-hold investors are looking for, and the industry’s momentum could produce sustainable gains for both.
This is why spending $500 to buy shares of both companies is a great investment idea.
Clean balance sheets
Energy companies can be cyclical. Your revenue increases when the economy is doing well and oil and natural gas prices are high. Conversely, profits fall during recessions and when commodity prices fall. Long-term investors should prioritize companies that are financially prepared for downturns. Both ExxonMobil and Chevron have more cash than debt on their balance sheets. These companies, which have billions of dollars in land and equipment, are debt-free on a net basis.
Both companies are also working to complete blockbuster acquisitions. ExxonMobil buys Natural Resources Pioneer for $59.5 billion while Chevron gobbles it all up Hess for $53 billion. Both companies finance the business with shares. This benefits shareholders if a deal goes through when share prices are high, as fewer shares would be required to finance the deal and therefore the dilution to their existing investors would be less severe.
Using stocks to complete these deals also means that the companies maintain their excellent balance sheets. Once the acquisitions are complete, both companies can split the acquisitions and sell any assets of the companies that they do not wish to keep.
Huge amounts of money go to shareholders
ExxonMobil and Chevron are great at putting money into shareholders’ pockets. ExxonMobil has paid and increased its dividend for 42 consecutive years, and Chevron’s winning streak has lasted 37 years. These dividend stocks yield a solid 3.1% and 4%, respectively, at their current share price. Their squeaky-clean balance sheets mean shareholders can count on dividends to continue to grow and increase year after year.
In addition, the two companies are conducting extensive share buyback programs. ExxonMobil is increasing its annual share buybacks to as much as $20 billion once its Pioneer acquisition is completed, while Chevron is in the midst of a $75 billion program the company announced a year ago. Stock buybacks reduce the number of shares a company has outstanding, increasing earnings per share and increasing the stock price.
Consider how extensive these buyback programs are. ExxonMobil’s $20 billion program represents over 4% of its market cap (prior to the Pioneer deal). Chevron’s $75 billion program represents a quarter of its market capitalization (before the Hess deal). These buybacks are likely to drive up stock prices in the coming years.
High raw material prices could boost profits
Finally, there are reasons to believe that oil prices will stabilize at relatively high levels. Wars in Europe and the Middle East threaten to disrupt global oil supplies. The war has damaged Russian facilities and oil fields are vulnerable to conflict in the Middle East. Oil prices have been hovering around $80 a barrel since the start of last year, and some experts believe oil prices could be heading toward over $100 a barrel.
While higher commodity prices are hurting refining profits, the tailwinds for upstream earnings are likely to mean more benefit than harm to vertically integrated energy companies. ExxonMobil and Chevron reported record profits in 2022 on the back of prices of $100 a barrel, and further unexpected gains could result in more cash flowing to their shareholders given their clean balance sheets.
Both stocks are trading near their highest price-to-book ratios in a decade. However, disruptions on the industry’s supply side, as well as the excellent fundamentals of ExxonMobil and Chevron, should give investors confidence to buy stocks as oil prices could remain high for some time. The stars align for strong operational performance in the coming quarters.
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Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Chevron. The Motley Fool recommends Pioneer Natural Resources. The Motley Fool has a disclosure policy.
“2 Straightforward Oil Dividend Stocks to Buy Right Now for Less than $500” was originally published by The Motley Fool