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Sanctions upon sanctions and spiking fuel costs are drumming up concerns about the price of global fuel and the supply chain. Despite oil currently trading at $110 per barrel from March highs near $140, the national average for regular unleaded gas as of May 13th is $4.43, according to AAA. Some states like California and New York see prices as high as $5.87. And with the recent announcement of Biden canceling Alaskan and Gulf oil leases, market selloffs, Russian sanctions for longer, and growing volatility, we are highlighting three high-yielding energy stocks, Exxon Mobil (NYSE:XOM), Chevron (NYSE:CVX), and Valero (NYSE:VLO).
3 Best Energy Companies to Watch in 2022
Gas remains at record highs, and energy stocks stand to continue benefiting from increasing energy prices. We believe the current oil price is fair, fluctuating around its relative value, given current supply-demand dynamics. Given the war in Ukraine, there is still some speculative premium, but if the Fed successfully curtails inflation, it’ll likely dampen demand. Even at current prices, there are still names worth investing in for the long-term in oil and gas.
It’s interesting to see the energy fluctuation from 2000 to 2022. As a percentage of the S&P 500 market capitalization, energy is 60% lower in 2022 than it was in 2010. The entire sector might be undervalued by historical standards. While energy is cyclical, as we’re currently seeing, the U.S. economy contracted by -1.4% as measured by real GDP, and we are experiencing a downturn. Nevertheless, the energy sector is trending up. When comparing the S&P 500 weights and sector structures from 2000 to 2022, the upside potential as we look at the energy sector and its advantage in an inflationary environment makes it even more attractive, even trading at a premium.
As A Percentage of the S&P 500, Energy is Far Lower in 2022, Than It Was in 2000
While many companies are frequently added and removed from the S&P 500 index, classifications in the chart above may vary, as well as sector weights. However, the weight of the energy sector looks overdone and out of balance by historical standards. In the words of Warren Buffett, “It’s better to be approximately right, rather than precisely wrong.”
Energy is always in demand, given it’s a necessity rather than a luxury. Even with the overriding emphasis by society, governments, and global leaders to move away from fossil fuels, the stark reality is it will be decades before there is any noticeable impact. As the sharp rise in crude oil and natural gas persists, some stocks in the sector offer solid dividend yields and possess strong cash flow and a steady stream of income in this inflationary environment. If you hold energy stocks at all-time highs or you are contemplating purchasing energy stocks, consider rotating to those at a reasonable price with solid growth, profitability, and momentum grades.
3 Best Energy Stocks With Great Dividend Yields
Fuel up your portfolio with these stocks.
1. Exxon Mobil Corporation (XOM)
Market Capitalization: $358.15B
Quant Rating: Strong Buy
Quant Sector Ranking (as of 5/13): 6 out of 244
Quant Industry Ranking (as of 5/13): 4 out of 19
Dividend Safety Grade: C
There’s nothing crude about investing in oil and natural gas, especially when capitalizing on the +46% upward trend that energy giant Exxon Mobil has provided over the last year! A top energy stock to watch, XOM comes at a reasonable valuation (C grade), with forward P/E ratio of 8.61x, trading at a slight discount relative to its sector peers. XOM also possesses excellent profitability metrics, as shown below by its A+ profitability grade. With the stock’s increasingly bullish performance, let’s dive into the growth and profitability metrics to outline why this stock is a great option to fuel a portfolio.
XOM Growth & Profitability
RCK Data Analytics writes in his article Exxon Mobil: An Attractive Way To Invest In The Oil Patch, “More than 90% of Exxon Mobil’s upstream capital investments are expected to generate higher than 10% return at Brent prices equal to or more than $35 per barrel.” In addition to this positive assessment, 18 Wall Street analysts gave the company upward revisions within the last 90 days. Despite the company’s plan to exit Russia by June 24, which will cost XOM $3.4B, the company has a cash hoard of $53.65B and remains highly profitable.
Companies like XOM should experience tailwinds, given that commodity price volatility has little impact on their earnings, explicitly tied to production and processing. As gasoline prices jumped to record highs this month, a Seeking Alpha article notes,
“With oil product demand expected to reach an all-time high in 2022 and supply reduced in the US and Europe, consumers are left scrambling for spare capacity elsewhere. Two refineries are planned to begin operations in the Middle East during 2022, bringing relief in the second half of the year. Exxon (XOM) is also building a new 250kb/d refinery in Texas.”
Although XOM missed Q1 2022 EPS of $2.07 by $0.16, revenue of $90.50B beat by $5.62B (53.01% year-over-year). Exxon also offers relative strength in forward revenue growth (C grade) and operating cash flow growth (B+), delivering more than its sector median. With COVID fears fading and increased commodity prices, key plans are at the forefront of success in the Permian and Guyana Basins, with low-cost projects and partners like Hess (HES) aiding in production growth.
Exxon not only has a strong cash flow, but its dividend grades are also solid, having paid a consecutive dividend for 40 years. With a forward Dividend yield of 4.08% and a solid dividend safety grade, this stock should continue to pay a dividend for the foreseeable future.
XOM is strongly bullish, and its short-term price activity shows that this stock has solid momentum.
Despite XOM’s earnings falling slightly short of market expectations, the robust refining environment should allow the company to capitalize substantially. The year-to-date share price performance of +40% is stellar, with the six-month and nine-month price performance substantially outperforming the sector median by more than 90%. When looking at trading volume over the previous few weeks, its rising stock coupled with above-average volume is an excellent sign that investors are willing to pay higher prices for shares, hence its B Momentum grade.
2. Chevron Corporation (CVX)
Market Capitalization: $315.90B
Quant Rating: Strong Buy
Quant Sector Ranking (as of 5/13): 5 out of 244
Quant Industry Ranking (as of 5/13): 3 out of 19
Dividend Safety Grade: B
Like Exxon, Chevron Corporation has rebounded significantly from pandemic lows and is rallying as a Top Energy Stock, trading near 52-week highs. Operating upstream, midstream, and downstream segments, Chevron does it all. Rising fuel costs and continued “pain at the pump” make this integrated oil giant an excellent portfolio addition.
Although Chevron’s D+ valuation is not ideal, it still trades in line with its peers, with a forward P/E ratio of 10.05x, and both EV/Sales and EV/EBITDA command Seeking Alpha B grades on these underlying valuation metrics. Its other factor grades are excellent.
While CVX may not be trading at investors’ preferred discounts, we like to focus on stocks’ collective attributes. The grades for growth, profitability, momentum, and revisions are attractive. Twenty-one analysts revised their revisions up within 90 days, and there have been zero down revisions. Let’s dive into CVX’s profitability and growth.
Chevron Profitability & Growth
Some large companies, especially in the energy sector, tend to have the most liquid stocks, best profitability, and the means to pay handsome dividends. Even during market volatility, commodities can be rewarding for protection and profit in an inflationary environment, which is why the energy sector is a way to Inflation-Proof Your Portfolio. With A+ Cash from Operations sitting at $33.05B and B- EBIT Margins (TTM), ongoing global conflicts will continue to drive oil and gas prices. Thus, CVX’s overall Profitability Grade should remain at an A+.
Despite Chevron’s recent Q1 2022 EPS of $3.36 missing by $0.08, the revenue of $54.37B beat by nearly 70%, and the company has an excellent balance sheet. Therefore, the dividends are likely to increase over the next few years.
“We generate more free cash flow than we ever have in the past. And that means we’re able to grow the dividend at very competitive rates and have this buyback that we can maintain across the cycle…We grew our dividend 6% earlier this year. Our dividend is up nearly 20% since COVID, while many in the industry cut their dividends during the last couple of years. Our investment — organic investment is up more than 30% versus last year…With higher commodity prices, affiliate dividends are expected to be $1 billion higher than our previous guidance. – Pierre Breber, Chevron VP & CFO.
Looking at Chevron’s dividend scorecard, it is no wonder that Chevron’s management is optimistic about its future. The company has a 3.45% forward Dividend yield and has consistently paid a dividend for 34 years, with six years of consecutive growth. Chevron is a notable name with a track record of supplementing the income being eaten away in this inflationary environment with the rise in energy stocks. Consider Chevron as an energy stock to invest in.
3. Valero (VLO)
Market Capitalization: $49.37B
Quant Rating: Strong Buy
Quant Sector Ranking (as of 5/13): 15 out of 244
Quant Industry Ranking (as of 5/13): 1 out of 22
Dividend Safety Grade: B+
Our final stock pick is the oil and gas refining and marketing company Valero Energy Corporation. The company stands to benefit from inflation, increased oil and gas prices, and high demand. The company is headquartered in San Antonio, Texas, so is also well-positioned to capitalize on demand from its neighbor, Mexico. According to the U.S. Energy Information Administration, despite its status as a large crude oil exporter, Mexico is a net importer of refined petroleum products. Declines in domestic production of liquid transportation fuels have increased Mexico’s use of foreign sources of refined petroleum products.
A petrochemical and transportation fuel manufacturer with a solid C- valuation, VLO is bullishly trending with excellent momentum. Year-to-date, the stock is +61%, and over the last year, it is +58%. Despite its average valuation, the company’s quarterly share price performance is excellent, as evidenced by the below momentum grades.
Significantly outperforming its sector peers, not only has the overall price-performance seen steady increases over the year, the company’s solid balance sheet, high demand for oil products, and limited supplies should position VLO well for future growth and profitability.
VLO Growth And Profitability
I last wrote about VLO in an article called Top 5 S&P 500 Stock Picks to Buy Now because VLO’s strong growth prospects, profitability metrics, and solid balance sheet have enabled the company to pay its shareholders a dividend yield of 3.26%. “Dividend growth investors are in a terrific spot as the company’s balance sheet is recovering quickly, leaving room for high dividend growth and accelerating share buybacks,” writes Seeking Alpha Contributor Leo Nelissen.
The company recently declared a $0.98 dividend in line with its previous, following excellent quarterly results on the back of elevated energy prices around the globe.
As you can see by the revenue growth grade, VLO outperforms its peers by more than 60%. Earnings for Q1 2022 resulted in top-and bottom-line beats, with EPS of $2.31, beating by $0.66, and revenue of $38.54B, beating by $6.31B. Valero reduced their long-term debt by $750M via debt reduction and refinancing transactions. Valero’s refining segment generated $1.45B of operating income in Q1 2022 versus the previous $592M loss for the same period in 2021. What’s great about Valero is that, in 2021, it generated 73% of its sales in the U.S. Given the geopolitical concerns affecting nations worldwide, VLO will stand to benefit from overseas demand and its ability to capitalize on high free cash flow. When seeking long-term dividend growth, energy companies are an excellent opportunity to reap the benefit of supply chain constraints and increasing prices. The three stock picks come with solid dividend scorecards, high dividend yields, and strong fundamentals. Although investor fear is moving the markets, high-quality assets in demand tend to deliver. Consider adding them to your portfolio.
This year, energy and commodities have rallied, with oil maintaining above $100 a barrel. Not only have our stock picks rebounded from pandemic lows, but geopolitical issues in Europe have passed along spiking prices to consumers. Each of our three recommendations possesses a forward revenue growth rate above 20% and an outstanding forward EBITDA growth rate above 55% Although XOM, CVX, and VLO are strong buys and should do well given the tailwinds, solid growth, and profitability outlooks, buying energy stocks in the current volatile environment is not without risks. If peace were to be declared in Europe, or countries with sanctions did an about-face, we would witness a severe drop in energy prices. Right now, this seems unlikely, and we are focusing on energy stocks that still offer growth at a reasonable price.
While we believe that the spike in prices is likely to remain elevated for some time, we are also supported by history. Buying energy stocks during periods of high inflation and rising sanctions has proven to be successful historically. Our top three stock picks possess solid fundamentals, great dividend yields, and excellent cash for operations, ensuring these stocks remain on an upward trend.
Our investment research tools help to ensure you’re furnished with the best resources to make informed investment decisions. In this volatile environment, consider using Seeking Alpha’s ‘Ratings Screener’ tool to help you achieve diversification into desired sectors you like, including energy or commodities.