Many income investors who are looking for yield in the energy sector tend to gravitate to large-cap oil giants like Exxon Mobil Corporation (XOM), or Chevron Corporation (CVX). Exxon is one of the largest companies in the world and it yields about 2.6%. It trades for about 12 times earnings which is reasonable, but not necessarily cheap. Chevron looks like a better deal in terms of valuation, as it offers a higher yield at about 3.2%, and it trades for about 10 times earnings. While these large-cap stocks offer relative safety and stability, the yields are not nearly as compelling when compared to smaller capitalization stocks.
While there might be more inherent risks when investing in smaller-company stocks, the rewards can make it worthwhile. Buying into these types of stocks should only be limited to a reasonable percentage of a portfolio, but it is easy to see why allocating some capital to smaller-cap stocks with giant yields can make sense. Here is a closer look at one company with exposure to the energy sector, along with a few reasons to consider buying the shares:
Calumet Specialty Products Partners, L.P. (CLMT) manufactures a range of specialty hydrocarbons. It processes and sells fuels and products such as asphalt. Calumet product lines also include naphthenic and paraffinic oils, solvents, white mineral oils, petroleum waxes, petrolatum and hydrocarbon gels. Some of the products are made for industrial use, while others are used for personal care products like body lotions, and lip balm.
This company has been in business since 1916 and it has grown through acquisitions: In 2011 it acquired the Superior Refinery and associated operating assets of Murphy Oil Corporation (MUR). This refinery has crude oil capacity of approximately 45,000 barrels per day and it produces gasoline, diesel, asphalt, heavy fuel oils and specialty petroleum products. Here are three reasons to consider buying this stock now:
1) The dividend payout is very generous and it has been rising for the past few years. For example, in May 2008, the quarterly payout was 45 cents per share, but now it is up to 59 cents per quarter.
2) Calumet shares recently were given a "strong buy" rating by analysts at Zacks Investment Research. Solid backing by analysts can raise investor interest in a stock, and that can lead to a higher share price in the future.
3) Growth and expansion potential: The company recently announced it would acquire Montana Refining Company, Inc. for about $120 million. Montana Refining owns and operates a refinery in Great Falls, Montana, that produces gasoline, distillates and asphalt. This acquisition is likely to boost revenues and there could be cost-cutting benefits as well.
Here are some key points for CLMT:
- Current share price: $26.96
- The 52 week range is $15.99 to $27.74
- Earnings estimates for 2012: $3.17 per share
- Earnings estimates for 2013: $2.58 per share
- Annual dividend: $2.36 per share, which yields 9.4%
Data is sourced from Yahoo Finance.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: No guarantees or representations are made. Hawkinvest is not a registered investment advisor and does not provide specific investment advice. The information is for informational purposes only. You should always consult a financial advisor.