After sifting through countless small caps and mid-cap stocks to rule them all over the past 20 weeks, the time has finally come to tackle large-cap companies. Large caps will usually not offer the same torrid growth pace that can be found with small caps, but their businesses are often well established globally, with a rich history of profitability. This global presence gives large caps a distinctiveness that small and mid-caps usually don't have -- namely, that many pay a dividend and can essentially run on autopilot in your portfolio.
For reference, here are the previous five choices:
What it does
Chevron engages in petroleum, chemicals, mining, power generation, and energy operations worldwide. The company, second only to ExxonMobil in the major oil and gas sector, is responsible for employing 62,000 people worldwide.
How it stacks up
My initial inclination was to go with ConocoPhillips (NYS: COP) here and not Chevron, because of the expected benefits shareholders should receive once Conoco breaks into two separate companies. However, once I really dug into the underlying balance sheets and their historical growth rates, I concluded that Chevron offers one of the safest dividends and the most reasonable long-term value in the sector.
Like other large oil and gas plays, Chevron relies heavily on favorable price realizations from oil and gas, as well as healthy refining margins in order to produce healthy profits. Since the lows of the credit crisis, oil prices have been on a steady incline, which has produced near-record profits for Chevron. In its most recent quarter, Chevron reported profits of $7.7 billion, up from just $5.4 billion in the year-ago period and it has produced a staggering $13.2 billion in free cash flow over the trailing 12 months. This cash allows Chevron to fund its expansion into the Marcellus shale region of the eastern U.S., as well as pursue offshore drilling permits in the Gulf of Mexico and worldwide.
Let's take a closer look at why Chevron, instead of a competitor, deserves a spot in the 10 large caps to rule them all list.
Gross Margin (TTM)
Consecutive Years of Dividend Increases
BP (NYS: BP)
Total (NYS: TOT)
PetroChina (NYS: PTR)
TTM = trailing 12 months.
The first fact that stands out is just how inexpensive the entire sector is. With all six companies trading at single-digit forward earnings multiples, I needed to dig a bit deeper to find differences. Gross margin gave me the answer I was looking for. On a 12-month trailing basis, Chevron blows its competitors out of the water. While it may not offer a dividend as lofty as BP's or Conoco's, it trails only ExxonMobil in the number of consecutive annual dividend increases.
How it could make you money
One of the main reasons to own Chevron is because of the stability of its dividend. Over the past five years, Chevron has grown its dividend by an average of 8.5% per year. This is where the other side of having $13-plus billion in free cash flow comes into play. Not only does it fund oil and gas exploration, but it allows for a cash safety net for future dividend payments.
Energy demand is always heading higher, so buying into Chevron is going to lock your portfolio into a company that will be able to withstand most major stock market corrections. While this isn't to say that Chevron won't head lower with oil prices, if they drop, the world demand for oil will not be going to zero anytime soon. With barriers to entry extremely high in the oil and gas sector, Chevron's position as a dominant force in the oil and gas sector is well-protected. That's why it finds itself among the 10 large caps to rule them all.
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At the time thisarticle was published Fool contributor Sean Williams owns shares of Bank of America, but has no material interest in any other companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy that's gushing with transparency.
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