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:
Exxon Mobil Corporation (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 Corporation (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.