Finding high returns while the stock market is near all-time highs is difficult, but not impossible. You just need to be careful and stick with financially sound companies with size and scale to survive in tough business environments like the one COVID-19 has sparked. In that sense, these two high-performance stocks in the unfavorable energy sector appear to be survivors. In the meantime, you can pick up historically high returns while waiting for the tough times to pass. Here is a primer on Chevron (NYSE: CVX) and Business Product Partners (NYSE: EPD).
1. The cleanest balance
Chevron is one of the largest integrated energy companies in the world. It has increased its dividend annually for 33 consecutive years and today offers a 5.6% return, which is close to a 30-year high. To be fair, the energy sector today is profoundly disadvantaged, largely because demand has plummeted, along with oil and natural gas prices, as countries around the world effectively closed to stem the spread of COVID-19. However, despite a massive supply / demand imbalance, oil and natural gas remain vital sources of global energy. And the industry is working slowly to reduce supply, both voluntarily and through company failure.
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Meanwhile, Chevron has a rock solid bottom line and a globally diversified business. For example, the company’s financial debt to equity ratio was approximately 0.25 times at the end of the first quarter. That is lower than that of any of its closest peers. The company’s agreement to buy Noble energy Meanwhile, in an all-stock transaction, it’s one more sign of strength: The oil giant is basically looking to pick up good assets, while others are just trying to survive. Noble will expand Chevron’s US position and expand its reach in the Mediterranean. Meanwhile, the rest of the company’s business spans from the upstream space (drilling) to the downstream field (chemicals and refining). Diversification is good for your portfolio and also for a company’s business.
There is no easy solution to problems in the energy sector, which will take time to solve. And buying Noble means taking on that company’s debts (approximately $ 8 billion), which will have a slightly negative impact on your balance sheet. But this conservative industry giant is going through this difficult period, and there is a high probability that a stronger company will come out on the other side. In the meantime, you can get a huge dividend that management continues to support.
2. Move things along
The next name is the Master Enterprise Partners limited company, which currently offers a huge return of 9.5% (close to the highest levels in its history). That distribution, meanwhile, is backed by more than two decades of annual increases. And just as importantly, it has a massive and diversified midstream portfolio that would be difficult, if not impossible, to replicate. This is vital, because approximately 85% of Enterprise’s gross margin is tied to fees, meaning you are paid to move products through your system. The price of what flows through your pipes, storage and processing assets is not the key factor – volume is.
YCharts CVX Dividend Performance Data
To be fair, low oil prices and reduced economic activity due to the coronavirus will hit volumes. However, the association covered its distribution 1.6 times in the first quarter, so it appears to be well positioned to handle adversity. That said, investors should expect revenue to be affected by lower demand for Enterprise services, and growth may slow as customers backtrack on their expansion plans (reducing the need for more tier infrastructure. medium). However, the great performance seems like decent compensation for those issues.
In addition to all of this, Enterprise has a long history of conservative operation. That includes things like a focus on diversification and strong distribution coverage. But the modest use of societal leverage relative to its peers is also notable. Financial debt to EBITDA was around 3.5 times at the end of the first quarter, which is towards the low end among its peer group. Investors looking for a way to evade the volatile nature of energy prices and continue to find a way to put some money into the energy sector would do well to take a closer look.
Time for some deep dives.
There is no perfect investment, and both Chevron and Enterprise Products Partners have warts. But if you can look beyond the surface blemishes here, you’ll find that both have a lot to offer investors in dividends. They both deserve a closer look today.
