When it comes to size, Exxon Mobil (XOM – Free Exxon Mobil Stock Report) is the largest. Hands down, the company is the most prominent publically traded name in the oil industry. It is not, however, the entire industry. Fellow Dow-30 component Chevron (CVX – Free Chevron Stock Report) is less prominent, but also less expensive—a combination that could make it a more desirable option for income investors.
The Capital Structure box contains a company’s market capitalization. Exxon’s is just over $400 billion, while Chevron weighs in at a little over $200 billion. Both are clearly very large companies. They are also very similar in other regards.
Both have Average (3) Timeliness Ranks and Top-Notch Safety Ranks (1, Highest). Both of these proprietary Value Line measures are shown in the Ranks box. So while neither is expected to outperform over the next six to 12 months, both are financially solid companies that Value Line expects to hold up well in rough waters.
Looking at the balance sheet, both have very low levels of debt (found in the Capital Structure box) and material cash holdings. In fact, as the Current Position box shows, Chevron actually has more cash on hand, with $21.5 billion, than Exxon, with “just” $18.0 billion. The companies’ cash and debt profiles, along with their size and earnings histories, among other factors, led to Value Line awarding both companies A++ Financial Strength ratings. This figure is found in the Ratings box, along with strikingly similar scores for Value Line’s proprietary Price Stability, Price Growth Persistence, and Earnings Predictability.
Looking to the future, Value Line’s analysts are expecting similar revenue and earnings growth rates over the next three to five years. As the Annual Rates box shows, Exxon is expected to increase its top and bottom lines by 10.0% each on an annual basis, while Chevron is expected to advance revenues by 10.0% annualized and earnings by 10.5%.
So far, size is the only material differentiating characteristic. However, valuation is always an important consideration when investing and this is another important discriminating factor. On this front, both companies are priced “cheaply” relative to the market, but Chevron is the cheaper of the two, sporting a 0.53 relative P/E to Exxon’s 0.74 (found in the Top Label section that runs across the top of the report).
This alone could sway a value investor to favor the smaller company, but it isn’t the only difference. Chevron’s dividend yield was recently 3.2% compared to Exxon’s 2.6%. This difference isn’t massive, but for an investor looking to live off his or her dividends, a few extra dollars can go a long way. (One hundred thousand dollars invested in each company would result in yearly income of $3,200 and $2,600, respectively.) Adding a little more luster to Chevron is analyst Jeremy Butler’s dividend growth expectations, which comes in at 9.5% annualized growth over the next three to five years—1.5 percentage points better than Exxon’s projection (found in the Annual Rates box). That may not sound like much, but over time it can be material. Note, however, that dividend growth for both companies is expected to handily outpace the historical growth rate of inflation, which is closer to 3%.
Clearly Exxon Mobil has name recognition and this is part of the reason for its premium pricing. There is some value in a name, however, that doesn’t mean that a similarly strong company with less “name value” should be passed over. In this case, the two companies are selling commodities that are, largely, interchangeable. As such, one company’s product is probably not better or worse than the other company’s offering. Indeed, this isn’t a case of stepping down in quality from name brand food to off brand food.
This valuation gap, interestingly, has narrowed over the past few years, with Chevron’s shares advancing 52% over the trailing five years to Exxon’s a far more meager 14%. A similarly large discrepancy exists over the trailing three years (both sets of figures can be found in the Total Return box to the right of the Graph). It is entirely possible that, over the next few years, the pricing gap will narrow even further.
Investors looking for a company that is easy to follow because it is always in the news would do well with an investment in Exxon Mobil. It is a well-run company and priced cheaply relative to the broader market. However, investors willing to own a company without as much name cache, Chevron is still a compelling option—for now.
At the time of this articles writing, the author did not own shares in any of the company’s mentioned.