Exxon vs. Chevron: Battle of the Oil Dividend Behemoths

 

NEW YORK (TheStreet) -- At a time when few stocks are undervalued due to the five-year bull market, oil giants Exxon (XOM) and Chevron (CVX) stand out as high-quality businesses that are cheap relative to the overall market.

Exxon is the largest publicly traded oil and gas corporation in the world, and second-largest publicly traded corporation overall based on its market cap of over $424 billion. Chevron is the third-largest publicly traded oil and gas company, with a market cap of over $242 billion.

The S&P 500's P/E ratio currently sits at around 19. The historical average P/E ratio for the market is about 15. Exxon and Chevron have not taken part in the overall market rally. Exxon's P/E ratio is just 12.68, while Chevron's is even lower at 12.05.

At close to $100, Exxon shares are down nearly 2% for the year to date while Chevron's, at $127.50, are up nearly 3% for the same period. By contrast, the S&P 500 is up 7.5% for the year to date.

Oil Industry Still Has Strong Growth Ahead

According to the U.S. Energy Information Administration, growing domestic production of natural gas and crude oil continues to reshape the U.S. energy economy, with crude oil production approaching the historical high achieved in 1970 of 9.6 million barrels per day.

Global energy demand is expected to rise from about 500 quadrillion BTUs a year now to over 700 quadrillion BTUs a year in 2040, according to an Exxon report. Energy demand increases will come from population growth and growing GDP in developing markets. Demand increases from population and rising GDP will be partially offset by more efficient energy use in the developed world.

Despite the popularity in renewable energy sources, oil and gas will provide the bulk of energy the world demands for the foreseeable future. Solar, wind and biofuel energy sources are expected to grow at nearly 6% a year over the next several decades compared to less than 1% and 2% average expected growth for oil and gas, respectively. Even with strong growth, alternative energy sources are expected to provide under 30% of total energy demand by 2040, again, according to Exxon.

What can shareholders expect?

Those invested in Chevron will likely see returns of about 12% a year over the next several years from production growth, dividends and share repurchases.

  •  Chevron production growth of 7%
  •  Chevron dividend yield of 3.4%
  •  Chevron share repurchases of 1.6%

 

Shareholders of Exxon stand to gain around 10% a year over the next several years from organic growth, dividends and share repurchases.

  •  Exxon organic growth of 4%
  •  Exxon dividend yield of 2.8%
  •  Exxon share repurchases of 3.2%

Here's how the two giants stack up using my 8 Rules of Dividend Investing.

Chevron has paid constant or increasing dividends for 26 consecutive years without a reduction, while Exxon has paid increasing dividends for 32 consecutive years. Chevron has a dividend yield of about 3.4% compared to Exxon's dividend yield of about 2.8%. Chevron ranks higher than Exxon based on this metric due to its higher yield.

When it comes to payout ratio, Chevron's 38.50% beats Exxon's payout ratio of 32.90%. However, Exxon holds the advantage in this category because it has more room to increase its dividend payments faster than overall business growth due to its lower payout ratio.

As for growth, Chevron has only managed to grow revenue per share by under 4% over the last decade. Chevron's future growth prospects appear significantly more favorable than its historical growth rate. Its management expects to grow production by around 7% a year over the next few years.

Exxon has grown revenue per share at about 6% per year for the last decade. Historically speaking, Exxon holds the edge in this category. Chevron may outpace Exxon in revenue per share growth in the near future.

Chevron has a long-term standard deviation of about 27%. Exxon has a long-term standard deviation of about 25%. Both businesses' earnings are highly susceptible to fluctuations in oil prices resulting in higher volatility than would otherwise be expected. Exxon has a slight advantage over Chevron in this category.

And the Winner Is...

Exxon holds the advantage in dividend history, payout ratio and standard deviation. Chevron is the clear winner in the dividend yield category. Exxon's historical growth has outpaced Chevron's, but Chevron's management projects faster production growth over the next several years than Exxon.

So which company wins? Overall, Exxon outranks Chevron based on the "5 Buy Rules" from the 8 Rules of Dividend Investing. However, both businesses appear undervalued and could make excellent long-term investments for investors seeking dividend growth.

TheStreet Ratings team rates EXXON MOBIL CORP as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate EXXON MOBIL CORP (XOM) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, increase in stock price during the past year, attractive valuation levels, good cash flow from operations and increase in net income. We feel these strengths outweigh the fact that the company shows low profit margins."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • XOM's revenue growth has slightly outpaced the industry average of 2.6%. Since the same quarter one year prior, revenues slightly increased by 2.9%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • Compared to where it was a year ago today, the stock is now trading at a higher level, reflecting both the market's overall trend during that period and the fact that the company's earnings growth has been robust. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.
  • The company, on the basis of net income growth from the same quarter one year ago, has significantly outperformed against the S&P 500 and exceeded that of the Oil, Gas & Consumable Fuels industry average. The net income increased by 28.0% when compared to the same quarter one year prior, rising from $6,860.00 million to $8,780.00 million.
  • Net operating cash flow has increased to $10,202.00 million or 32.78% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -6.58%.

TheStreet Ratings team rates CHEVRON CORP as a Buy with a ratings score of A-. TheStreet Ratings Team has this to say about their recommendation:

"We rate CHEVRON CORP (CVX) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, attractive valuation levels, largely solid financial position with reasonable debt levels by most measures, increase in net income and increase in stock price during the past year. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • CVX's revenue growth has slightly outpaced the industry average of 2.6%. Since the same quarter one year prior, revenues slightly increased by 0.5%. Growth in the company's revenue appears to have helped boost the earnings per share.
  • The net income growth from the same quarter one year ago has exceeded that of the S&P 500, but is less than that of the Oil, Gas & Consumable Fuels industry average. The net income increased by 5.6% when compared to the same quarter one year prior, going from $5,365.00 million to $5,665.00 million.
  • CVX's debt-to-equity ratio is very low at 0.15 and is currently below that of the industry average, implying that there has been very successful management of debt levels. Although the company had a strong debt-to-equity ratio, its quick ratio of 0.99 is somewhat weak and could be cause for future problems.
  • In its most recent trading session, CVX has closed at a price level that was not very different from its closing price of one year earlier. This is probably due to its weak earnings growth as well as other mixed factors. Turning our attention to the future direction of the stock, it goes without saying that even the best stocks can fall in an overall down market. However, in any other environment, this stock still has good upside potential despite the fact that it has already risen in the past year.

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