Chevron and Verizon: Have Cash, Will Spend

NEW YORK (TheStreet) -- Companies like Apple (AAPL) have mountains of money that won't help the bottom line unless put toward expanding its business. Energy companies like Chevron (CVX) are traditionally leaders in capital spending, as are big telecoms like Verizon (VZ). So where should you direct your cash?

As we enter two of the best months (historically speaking) for the S&P 500, the markets may be overdue for a break. The average S&P 500 rally in November and December during years that started with big stock market rallies is almost 6%. But, just in case the markets take a step backward before taking two steps forward, you may be well advised to focus on the capital-spending champions of the stock market.

Investors, especially during earnings season, want to see proof that companies are going to increase spending aimed at driving more revenue and better earnings. Forecasters are calling for close to an 11% earnings growth for S&P 500 companies in the year ahead. Capital expenditures -- equipment, production facilities, new technologies, accretive acquisitions -- are part of the reason why.

In its Nov. 1 earnings report, Chevron reported that it had spent $10.6 billion in three months, exceeding Exxon (XOM) by $100 million. Chevron's CFO Patricia Yarrington said during the conference call that CVX's spending this year would finish 10% higher than planned. Ms. Yarrington said spending would settle down once Chevron's huge Australian liquefied natural gas projects are out of the way.

"We continue to make good progress on our major capital projects," CVX Chairman and CEO John Watson added. "Construction continues, and important milestones are being reached, on our Gorgon and Wheatstone LNG projects in Australia."

The CEO also said that, "Important interim construction goals have been recently reached for our Jack/St. Malo and Big Foot deepwater projects in the Gulf of Mexico, in preparation for their project start-ups scheduled for late 2014. We are also moving forward on the development of our liquids-rich unconventional properties in the U.S."

Capital and exploratory expenditures in the first nine months of 2013 reached $28.9 billion, compared with $22.7 billion in the corresponding 2012 period. Chevron continues its long tradition of spending a meaningful amount of capital on equipment and projects that produce growth in the intermediate term while still paying an ample dividend to shareholders (around 3.4%) and maintaining a hefty stock buyback program.

Capital Expenditures in the Telecommunications Sector

Verizon is a good example of a telecom company that spends the majority of its capital by expanding its wireless networks and improving or replacing copper wire with fiber optic cable. Infrastructure. As of Sept. 30, Verizon had total cash of well over $57 billion and trailing twelve month operating cash flow of more than $35 billion.

The company pays a generous dividend (more than 4%) but knows how to wisely allocate capital to grow its most lucrative business segments. That's the reason it spent $130 billion ($58.9 billion in cash, $60.2 billion in stock and about $11 billion in smaller transactions) to buy Vodafone's (VOD) 45% stake in Verizon Wireless. A fine and welcome example of a company focusing its spending on the most lucrative enterprises.

To finance the deal, Verizon raised $49 billion in a bond offering. Verizon anticipates that the transaction to buy Vodafone's Verizon Wireless holding will close in the first quarter of 2014 and will be 10% accretive to earnings per share. That may be baked into the current share price of around $50.60, so if shares were to correct just 5%, we may be able to accumulate shares closer to $48 a share, giving shareholders a dividend yield-to-cost of 4.42%.

Other companies are sitting on piles of cash, especially in the energy sector. No matter what sector, it's usually prudent to buy companies that are expected to experience revenue growth as a direct result of smart, accretive investments in the most promising areas of their own industries and businesses. Chevron and Verizon are those kinds of companies, and the future revenue and earnings growth for both will substantiate the investment premise of this article.

At the time of publication, the author is long shares of CVX, VZ and VOD.

This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Marc Courtenay is the founder and owner of Advanced Investor Technologies, LLC, as well as the publisher and editor of www.ChecktheMarkets.com.

Courtenay holds a Master's of Science degree in Psychology from California Polytechnic State University, and is a former senior vice-president of Investments for two major brokerage firms. He's been a fiercely independent investment "investigator" and a consulting contributor to the investment publishing world for over 30 years. In addition to his role as an investment publisher and analyst, he serves as a marketing consultant to the investment media industries.

In his role as a financial editor, he specializes in unique investment strategies, overlooked stock investments, energy and resource companies, precious metals, emerging growth companies, the prudent use of option strategies,real estate related opportunities,wealth preservation, money-saving offers, risk management, tax issues, as well as "the psychology of investing". Because of his training and background in Clinical Counseling and Psychology, he enjoys writing about investor behavior, the ¿herd mentality, how to turn investment mistakes into investment breakthroughs and the stock market's behavioral trends and patterns.

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