By Renee O'Farrell
When it comes to investing, the major integrated oil and gas industry has always been a hot commodity (pun intended) - and why not? In general, the big players in this industry pay decent dividends, have low payout ratios and offer a strong history of delivering returns, but that doesn't mean that investors buying into this industry are going to play it right all the time.
Looking at the four largest U.S. companies in this industry - Exxon Mobil (XOM), Chevron (CVX), ConocoPhillips (COP) and Occidental Petroleum (OXY) - they are all down year to date, with Occidental down 12.38% so far this year.
Does that mean investors should steer clear? Not at all. But, it does serve to illustrate the importance of timing. The oil and gas industry is so stable that investors are unlikely to see huge returns in the short term. Rather, a longer-term approach is necessary to realize the full benefit.
Exxon recently traded at $82 a share, down almost 2% for the year. The company has a forward price-to-earnings ratio of 9.27 and pays a 2.78% dividend yield on a 22.71% payout ratio. Over the past five years, Exxon's earnings have increased by an average of 4.95% a year and they are expected to increase by 7.59% a year on average over the next five years. Analysts predict the company's earnings per share will go from $8.42 a share last year to $8.30 a share this year, rising to $8.86 a share next year. After that, the company's earnings are expected to fall to $8.67 a share. We are bullish about Exxon (check out 4 reasons to buy Exxon here), but I recommend investors only buy in if they are looking at t least a two year investment time frame. Ken Fisher's Fisher Asset Management is a fan of Exxon.
Chevron is priced at just under $101 a share, down 3.46% year to date. The company is trading at 7.52 times its forward earnings and pays a dividend yield of 3.53% on a 23.27% payout ratio. Chevron's earnings have grown at an average rate of 11.50% a year over the past five years. Analysts say the company's earnings should increase by an average of 5.12% a year over the next five years. Relatively the same optimal time frame can be seen in Chevron as Exxon. The company earned $13.19 a share last year. Its earnings are expected to go to $13.42 a share this year, ultimately rising to $13.55 a share next year until falling to $12.66 a share in 2014. Jim Simons' Renaissance Technologies likes Chevron.
ConocoPhillips recently traded at $52.53 a share, down 3.85% for the year. The company has a forward price to earnings ratio of 7.85 and pays a 4.99% dividend yield on a 28.27% payout ratio. Over the past five years, ConocoPhillips's earnings have decreased by an average of 1.48% a year and they are expected to increase by just 0.36% a year on average over the next five years. ConocoPhillips, of course, recently spun off part of its operations into Phillips 66 (PSX). Warren Buffett's Berkshire Hathaway is a fan of ConocoPhillips, but analysts are not too optimistic about the company. After ConocoPhillips brought in $8.76 a share last year, consensus estimates are putting the company's earnings at just $6.39 a share this year, up to $6.57 next year, then down to $6.21 in 2014. I think that investors looking to buy in ConocoPhillips would do well to either buy in now and plan to hold for a while or wait a year before buying in.
Occidental Petroleum is priced at $80 a share. The company is trading at 8.72 times its forward earnings and pays a dividend yield of 2.65% on a 23.48% payout ratio. Occidental's earnings have grown at an average rate of 10.80% a year over the past five years. Analysts say the company's earnings should increase by an average of 10.51% a year over the next five years. Ralph V. Whitworth's Relational Investors likes Occidental. The fund had 10.69% of its portfolio invested in the company at the end of 2011. Analysts are somewhat more encouraged on this company. While consensus estimates do put Occidental's earnings falling to $8.33 a share this year, down from $8.39 a share last year, analysts say the company's earnings should be around $9.30 a share next year, then fall slightly to $9.27 a share in 2014. I recommend either buying in now and selling in early 2014, after the earnings crest or holding.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.