Finding a quality business that pays a stable and growing dividend is a task in and of itself. But to find a company that is also a good value and has long-term growth prospects adds an additional layer of complexity.
Phillips 66 (PSX), Union Pacific (UNP), and Chevron (CVX) are three companies that you’re probably familiar with. Each business is an industry leader that also happens to be an excellent source of passive income. In fact, investing in equal parts of each company produces a dividend yield of 3.2%. Here’s what makes all three dividend stocks compelling buys now.
Fuel up on Phillips 66 and its dividend for the long haul
Scott Levine (Phillips 66): Whether it’s seeing solar panels appear on a neighbor’s rooftop or a country’s newly announced mandate regarding a targeted reduction in carbon emissions, enthusiasm for renewable energy is undeniable. That’s not to say that investors should start ringing the death knell for oil and gas stocks. Fossil fuels will continue to play a critical role for the foreseeable future, making a leading oil and gas stock like Phillips 66, and its forward dividend yield of 3.7%, a wise choice to buy and hold for decades.
Although Phillips 66 doesn’t engage in upstream activities, it has an extensive reach in other links of the energy chain. Regarding its midstream business, Phillips 66 owns and operates 22,000 miles of pipeline as well as 39 product terminals and 20 crude oil terminals — among other assets. In addition, Phillips 66 operates a vast number of downstream facilities, including 12 refineries located in the United States and Europe, and more than 7,000 outlets where it sells gasoline, diesel, and aviation fuel.
Investors who have even a superficial familiarity with the energy industry know that oil and gas prices have experienced extreme volatility during the past year. While the tumultuous nature of energy prices may be disconcerting, it shouldn’t preclude investors with a long investing horizon from picking up shares of Phillips 66, a company that has proven adept at navigating the volatility associated with energy prices.
Fortunately for bargain hunters, shares of Phillips 66 are on the discount rack. Currently, shares are valued at 9.9 times forward earnings, representing a steep discount to its five-year average forward earnings multiple of 16.8. Similarly, the stock looks inexpensively valued in terms of cash flow; it’s trading at 6.8 times operating cash flow — lower than its five-year average ratio of 9.7.
Railroads are the veins and arteries of the U.S. economy
Lee Samaha (Union Pacific): If you are going to commit to a buy-and-hold strategy for decades, then it’s a good idea to have a high degree of certainty that the company will be around over the long term. That’s where buying a railroad stock like Union Pacific comes in. There are many transportation stocks available to invest in, but there aren’t many that have their own infrastructure and have such a critical market position as the major railroads.
The railroads do compete with other forms of transportation, not least trucking. Still, there are only two significant players in West Coast rail shipping, Union Pacific and Berkshire Hathaway‘s (BRK.A/B) owned BNSF railway. The fact that Warren Buffett’s Berkshire Hathaway controls BNSF tells you all you need to know about the industry’s ability to generate recurring earnings and cash flow over the long term.
It also helps that moving freight by rail can reduce carbon emissions and highway congestion. As such, companies could help to meet their carbon emissions goals by shifting to rail.
In addition to the security of long-term volume and revenue growth, investing in Union Pacific offers the prospect of substantial earnings growth if management hits its aim of reducing its operating ratio (operating expenses divided by revenue) using precision scheduled railroading techniques.
Trading at a current dividend yield of 2.6%, Union Pacific offers investors a relatively stress-free way to invest and enjoy a growing dividend for many years to come.
Chevron’s profits are growing faster than its surging stock price
Daniel Foelber (Chevron): It’s hard for a stock to run up over 50% in less than a year and still be dirt cheap. But Chevron’s soaring profits more than support its record-high stock price.
Chevron reported another excellent quarter when it released its third-quarter results on Oct. 28. Higher oil and gas prices paired with a low cost of production and relatively low capital spending helped Chevron notch $29.1 billion in net income for the nine months ended Sept. 30. That is more profit than Chevron has ever earned in any calendar year. For reference, its record-high year from a profit perspective was in 2011 when it posted $26.9 billion in profit. Chevron is on track to blow that previous record out of the water.
Chevron is gushing free cash flow and using it to buy back stock, pay its growing dividend, and pay down debt off the balance sheet. In Q3 alone, Chevron paid $2.7 billion in dividends and purchased $3.75 billion of its own stock — which is more than 1% of total shares outstanding.
Its balance sheet is in its best shape in decades. Chevron finished the quarter with an adjusted debt (debt minus cash, cash equivalents, and marketable securities) position of just $8.2 billion — giving it a net debt ratio (adjusted debt dividend by adjusted debt plus total stockholder’s equity) of just 4.9% compared to 15.6% at the end of 2021.
From the fourth quarter of 2021 to Q3 2022, Chevron earned $17.58 in diluted EPS, giving it a price-to-earnings ratio of 10.2. It’s worth mentioning that in the last two quarters alone, Chevron has earned a staggering $11.73 in diluted EPS, which alone is higher than any full calendar year of diluted EPS in the last nine years. Chevron’s profits have so far outpaced the rate of its rising stock price. Given the company’s healthy financial position and industry leadership, Chevron stock and its 3.2% dividend yield look like an attractive opportunity.
— Daniel Foelber, Scott Levine, and Lee Samaha
Where to Invest $99 [sponsor]Motley Fool Stock Advisor's average stock pick is up over 350%*, beating the market by an incredible 4-1 margin. Here’s what you get if you join up with us today: Two new stock recommendations each month. A short list of Best Buys Now. Stocks we feel present the most timely buying opportunity, so you know what to focus on today. There's so much more, including a membership-fee-back guarantee. New members can join today for only $99/year.
Source: The Motley Fool