While investors continue to stare at a stock market that has remained very pricey and overbought, the only stocks that seem to go higher are very expensive tech and momentum stocks. The question for most investors now is where to put new money or profits from those pricey overbought stocks. The answer from many of the pros on Wall Street is decidedly big oil, and with good reason.
While the price of West Texas intermediate has remained range bound, the mega-cap large companies may be offering investors the best level to buy shares in years. The so-called supermajors have slashed costs and capital expenditures over the years while readjusting balance sheets, and they are the most prepared for oil to remain at the $50 level.
We screened the Merrill Lynch research database and found four stocks rated Buy that all pay at least a 4% dividend.
This integrated giant is a safe way for investors looking to stay or get long the energy sector, and it has big Permian Basin exposure. Chevron Corp. (NYSE: CVX) is a U.S.-based integrated oil and gas company with worldwide operations in exploration and production, refining and marketing, transportation and petrochemicals.
The company sports a sizable dividend and has a solid place in the sector when it comes to natural gas and liquefied natural gas (LNG). Some on Wall Street estimate the company will have a compound annual growth rate of over 5% for the next five years.
The company reported solid earnings for the second quarter, and analysts have noted that the Permian Basin remains a key source of capital flexibility, and it is a key issue behind their relative preference for Chevron versus some of the other majors. Merrill Lynch analysts noted this in their report:
Permian production is running ahead of guidance with implications on reducing sustaining capital for the broader portfolio. Major project starts, led by Gorgon continue to drive an inflection in free-cash-flow with the cash break-even trending below $50 by 2018.
Chevron shareholders receive a 4.08% dividend. The Merrill Lynch price target for the stock is $120, and the Wall Street consensus price objective is $116.62. The shares closed on Monday at $105.78.
The world’s largest international integrated oil and gas company remains a top Wall Street energy pick. Exxon Mobil Corp. (NYSE: XOM) explores for and produces crude oil and natural gas in the United States, Canada, South America, Europe, Africa, Asia, Australia and Oceania. It also manufactures and markets commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics, and specialty products, and it transports and sells crude oil, natural gas, and petroleum products.
The company posted some messy second-quarter results, and Merrill Lynch feels the stock is still an outstanding place for investors to put money now. The team also cites the ability of the company to maintain and cover the cash dividend at lower oil prices as a key positive, and a recent report said this:
Management could do a better job of highlighting unusual items; on review the second quarter met consensus in contrast with a perceived miss. Analysis of operating cash flow suggests Exxon had a second quarter cash break-even of $35 although capex is running 33% below guidance. With $2 billion of free cash in the second quarter before working capital, the company remains a low risk strategic route to reweighting energy portfolios.
Shareholders receive a 4.03% dividend. Merrill Lynch has a $90 price objective, while the consensus is target is just $83.03. The stock closed Monday at $76.38.