Top Strategist Moves Energy to Overweight: 5 Top Dividend Stocks to Buy Now

Energy

Published: March 21, 2017 9:10 am

Last Updated: January 12, 2020 1:46 pm

While the overall market continued to chug ahead during the first quarter of 2017 in a continuation of the Trump rally, energy stocks have suffered as the price of crude is down over 10% from highs and still trading below $50 a barrel. In fact, energy is close to a two-standard deviation underperformance versus the S&P 500 this quarter, something that has only happened three other times.

In a new research report from Savita Subramanian, the outstanding equity and quant strategist at Merrill Lynch, she moves the energy sector to an Overweight rating citing the fact it is the worst performer year to date, the overall positive view on oil and earnings, plus the current positioning and valuation. We covered the sector upgrade in depth.

We screened the Merrill Lynch energy research universe and found five top stocks rated Buy, all of which pay outstanding dividends.

Chevron

This integrated giant is a safer way for investors looking to stay long the energy sector, and it has big Permian Basin exposure. Chevron Corp. (NYSE: CVX) is a U.S.-based integrated oil and gas company with worldwide operations in exploration and production, refining and marketing, transportation and petrochemicals.

The company sports a sizable dividend and has a solid place in the sector when it comes to natural gas and liquefied natural gas (LNG). Some on Wall Street estimate the company will have a compound annual growth rate of over 5% for the next five years.

Chevron missed estimates badly, and combined with the dip in crude price, has sold off, giving investors a great entry point. Many analysts feel the company is the best positioned integrated.

Chevron shareholders are paid an outstanding 4.01% dividend. The Merrill Lynch price target is a massive $145, and the Wall Street consensus price objective is lower at $126.26. Shares closed trading on Monday at $107.66 apiece.

ConocoPhillips

This stock may offer investors solid upside potential and the company could start growing the dividends again. ConocoPhillips (NYSE: COP) explores for, produces, transports and markets crude oil, bitumen, natural gas, LNG and natural gas liquids (NGLs) worldwide.

Conoco’s portfolio includes resource-rich North American tight oil and oil sands assets; lower-risk legacy assets in North America, Europe, Asia and Australia; various international developments; and an inventory of conventional and unconventional exploration prospects. Many Wall Street analysts feel the company can accelerate growth from a reloaded portfolio depth in the Bakken and Eagle Ford, and with visibility on future growth from a sizable position in the Permian.

Conoco has redefined its investment case with the highest free cash leverage to a recovery in oil prices among the big oil plays. Management has addressed key questions around portfolio resilience: maintenance capital expenditures have dropped to $4.5 billion and share buybacks have been prioritized over growth.

Conoco investors are paid a 2.31% dividend. Merrill Lynch has a $70 price target on the stock. The consensus target is much lower at $57.90. The stock closed most recently at $45.86 per share.

Marathon Petroleum

This top refiner has been on a nice roll, but it still trades well below highs posted in late 2015. Marathon Petroleum Corp. (NYSE: MPC) recently was added to the Franchise Picks List, and it has a diversified business that operates through Refining & Marketing, Speedway and Pipeline Transportation segments.

The company owns and operates seven refineries in the Gulf Coast and Midwest regions of the United States, which refine crude oil and other feedstocks, and it distributes refined products through barges, terminals and trucks, as well as purchases ethanol and refined products for resale.

The company announced in January its plans to significantly accelerate its dropdown of assets with an estimated $1.4 billion of master limited partnership eligible annual earnings before interest, taxes, depreciation and amortization being transferred to MPLX.

Marathon Petroleum investors are paid a solid 2.85% dividend. The $67 Merrill Lynch price target compares with the posted consensus price objective of $61.85. The stock ended the day on Monday at $50.50 a share.

Occidental Petroleum

This is another of the higher yielding domestic stocks in the energy sector. Occidental Petroleum Corp. (NYSE: OXY) is an oil-levered multinational organization with principal business segments in oil and gas and in chemicals. The oil and gas segment explores for, develops, produces and markets crude oil and natural gas, primarily in the U.S. Permian Basin, Colombia, Bolivia, Libya, Oman, Qatar and Yemen. The chemicals segment manufactures and markets basic chemicals, vinyls and performance chemicals.

With a rock-solid balance sheet and a commitment to dividend coverage, investors look safe for now. Occidental has paid quarterly cash dividends continuously since 1975, and it has increased its dividend each year since 2002.

Shareholders are paid a huge 4.78% dividend. The Merrill Lynch price target is $83. The consensus target is $75.09, and the shares closed Monday at $63.66.

Royal Dutch Shell

This company has survived the plunge in oil pricing as good as or better than any other major integrated stock. Royal Dutch Shell PLC (NYSE: RDS-A) operates as an independent oil and gas company worldwide through its Upstream and Downstream segments. The company explores for and extracts crude oil, natural gas and NGLs.

Royal Dutch Shell also converts natural gas to liquids to provide fuels and other products; markets and trades crude oil and natural gas; transports oil; liquefies and transports gas; extracts bitumen from mined oil sands and converts it to synthetic crude oil; and generates electricity from wind energy.

Royal Dutch Shell investors are paid a huge 6.1 % dividend. The $60 Merrill Lynch price target is in line with the consensus target for the European oil giant of $59.94. The shares closed most recently at $52.41 apiece.

These five outstanding stocks for growth and income investors to buy are all being offered at a much better price point than most of the S&P 500. While oil could remain volatile, these top companies can weather the storm and come out in good shape.

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