Fill Up the Gas, Check the Dividend Yield: 3%-ish at Exxon and Chevron, and Rising

Last month’s dividend hikes at ExxonMobil (XOM) and Chevron (CVX) gave investors new reason to consider the country’s biggest oil companies at a time when their share prices are relatively cheap. But which energy behemoth will pay off best long-term? The answer depends, somewhat, on the price of natural gas.

Exxon actually produces more natural gas than oil these days, having jumped into the domestic gas frenzy in a big way a couple of years ago. Chevron was leery of the trend from the get-go and still collects the vast majority of its profits from oil. That distinction paid off for Chevron recently when spot prices for natural gas halved but oil prices – Brent crude and West Texas Intermediate – suffered only temporary declines.

Henry Hub Natural Gas Spot Price Chart

Henry Hub Natural Gas Spot Price data by YCharts

Exxon’s natural gas investments helped disappoint investors with first quarter results showing an 11% overall profit decline. The company announced a 21% dividend boost in consolation, which brings the yield on the shares now to about 2.6%. With a $406.9 billion market cap, Exxon now pays out more in dividends than any other company in the world.

XOM Net Income TTM Chart

XOM Net Income TTM data by YCharts

Chevron, on the other hand, was the rare big oil company to offer profit gains during the first quarter. With a market cap about half of Exxon’s, it boosted its dividend 11% to a current dividend yield of 3.4%.

CVX Net Income TTM Chart

CVX Net Income TTM data by YCharts

So which company will see its favored commodity rise more this year? Generally, the pundits are betting on oil. Long term, your guess is about as good as anyone’s, as these forecasts tend to have very short shelf lives. The International Monetary Fund’s forecast last month predicted oil prices will be up about 10% in 2012. In January, it forecast a roughly 5% decline for the same time. Experts now predict natural gas prices will average $2.75 per million Btu in 2012. Barely four months ago, the average forecast was $4.40 per unit.

In reality, big oil profits are controlled by a long list of factors that are comically difficult to forecast. Shareholder returns are at the mercy of commodity prices, drilling gambles, perpetual asset sales and acquisitions, and hedging talents on both commodities and foreign exchange desks. Instead of joining the guessing game, investors can focus on valuations and track records to find companies able to keep shareholders well fed through the peaks and troughs inherent in drilling.

YCharts Pro gives both Exxon and Chevron excellent ratings for fundamentals and share price value. In the market, Exxon retains a reputation as having the most solid balance sheet in the sector. But both companies have strong free cash flow at well above 2010 levels (a better year all around). It’s an important indicator for investors who will need dividends and stock buybacks to keep them in gains during rough years.

XOM Free Cash Flow TTM Chart

XOM Free Cash Flow TTM data by YCharts

On price/earnings valuations, Chevron has traded about 3 points under Exxon with almost exacting consistency for more than five years.

XOM PE Ratio Chart

XOM PE Ratio data by YCharts

We can see this played out as Chevron rising earnings helped its share price, which has broken away from its usually tandem movements with Exxon’s share price.

XOM Chart

XOM data by YCharts

Chevron stands out on in the industry, consistently, for its operating margins. While this number, too, would get a little help from that more-oil-than gas set-up, it suggests reasons to believe in this management team.

XOM Operating Margin TTM Chart

XOM Operating Margin TTM data by YCharts

Industry analysts are slightly more bullish on Chevron these days than Exxon, largely because of reasons tied to its oil advantage. Given Chevron’s track record recently, it’s not hard to agree with that choice; even for those who remain skeptical of betting on a commodity forecast.

Dee Gill is an editor for the YCharts Pro Investor Service which includes professional stock charts, stock ratings and portfolio strategies.

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