Between Exxon Mobil Corporation (NYSE:XOM), Chevron Corporation (NYSE:CVX) and BP plc (ADR) (NYSE:BP), which company presents the best value for income-oriented investors? This is arguably the most recurrent debate in income-investment circles.
As an income investor, your satisfaction is not drawn from the hefty paycheck you receive at the end of every three-month period, but rather the repeated receipt of similar, or bigger, paychecks moving forward. You’d want to establish a risk-free portfolio which, even in your golden years, can be inherited by your grandchildren. If this is what you want, I’d recommend Exxon Mobil Corporation (NYSE:XOM) over Chevron Corporation (NYSE:CVX) or BP plc (ADR) (NYSE:BP).
Although all three companies present commendable income opportunities for investors, ExxonMobil goes a step further to offer security and peace of mind. With Exxon Mobil Corporation (NYSE:XOM), you can sit back and enjoy your retirement without having to constantly tap away at some device for news updates and stock trends.
Don’t BP and Chevron offer better yields?
On the face of it, BP and Chevron offer a better deal for income investors. BP currently offers a yield of around 5.3%. Chevron, on other hand, offers a yield of about 3.2%. Exxon Mobil Corporation (NYSE:XOM) trails the pack with its 2.8% yield. This essentially means that BP and Chevron investors are set to gain more (not in actual amount) when stacked against ExxonMobil shareholders. But is this all?
Don’t forget to read the fine print
1. Exxon Mobil Corporation (NYSE:XOM) offers a lower yield but generates more cash flow than Chevron (close to two times more). If anything, Chevron should have a lower yield than ExxonMobil, but it does not. Doesn’t this mean that Chevron is accumulating debt, or worse, tapping into its coffers in order to maintain its yield?
In 2012, Chevron's free cash flow came in at $7.9 billion compared with Exxon's $21.9 billion. This contrast suggests that Chevron should reduce its yield slightly and perhaps focus on another strategy to create shareholder value, like increased share buybacks. It can perhaps increase its current share buyback of approximately $1.3 billion.
2. How else do Chevron and ExxonMobil enhance shareholder value? Stock buybacks? Yes, they do have these. But as it is, ExxonMobil presents the best stock-buyback program when compared with Chevron and BP.
In 2012, it bought back $20.8 billion, compared with BP’s much lesser $4.1 billion. Even if BP buys back $8 billion as earlier announced, it will still trail ExxonMobil.
3. Is BP’s future that certain? As far as its stock is concerned, a downside could come at anytime. In addition to the weak oil prices that are hurting its margins, its court battles are also placing an equally significant strain on its stock.
By the fall of 2012, the oil big wig had spent a whopping $42.2 billion in meeting the costs and fines associated with the infamous 2010 Gulf of Mexico oil spill. However, that was merely the beginning. BP is still in court battling more than 160,000 claims. I believe that this court case, coupled with risks of thinning margins, beg the question: Is BP’s dividend yield sustainable in view of the looming uncertainty? I guess not.
ExxonMobil always has one foot in the future
Despite the innumerable challenges in the energy sector, ExxonMobil always manages to get through. It does this because it always has one foot in the future.
Let’s go back to mid 2010 when ExxonMobil closed the $31 billion XTO Energy deal. Although the closure of the deal provided more traction for ExxonMobil in the natural-gas sector, it was met with criticism in view of the weak forecasts for natural gas at the time. Indeed, natural-gas prices later hit unprecedented lows in mid 2012. This trend, however, changed and natural-gas prices have since trended upward. In fact, there are heading toward healthy levels.