It takes a heaping dose of contrarian thinking to be bullish on energy stocks and the relevant exchange traded funds in the current environment. Underscoring the contrarian thinking required to be bullish on equity-based energy ETFs, 17 such funds made 52-week lows on Tuesday.
That includes the Energy Select Sector SPDR (NYSEArca: XLE). XLE is the worst performer of the nine sector SPDRs this year, but being home to some of the largest energy companies in the world provides XLE with some advantages even at a tumultuous time for the energy sector.
The larger integrated oil companies are more flush and have a larger war chest to draw upon when times get tough. While big oil has cut stock repurchase plans to save cash, many bigger players have not gone so far as to cut back on dividends. For instance, Exxon and Chevron have historically exhibited a long standing of steadily increasing dividends and remain so-called dividend aristocrats. [Oil ETF Dividends Appear Safe…Sort Of]
Despite languishing oil prices and payout cuts and suspensions by smaller energy companies, many of XLE’s marquee components have boosted dividends this year. In April, Dow component Exxon Mobil (NYSE: XOM) said it will raise its quarterly dividend to 73 cents per share from 69 cents, extending the largest U.S. oil company’s dividend increase streak to 33 years.
Potentially seeing the forest through the trees, AltaVista sounded a bullish tone on XLE in a new research note, rating the ETF overweight, which implies above average appreciation potential.
Typically, funds in this category consist of stocks trading at attractive valuations and/or having above-average fundamentals,” according to AltaVista.
Still, there are causes for concern extending beyond low oil prices, notably Chevron (NYSE: CVX) not yet raising its dividend, imperiling a 27-year increase streak. Chevron is XLE’s second-largest holding. Chevron usually raises its dividend in April, around the same time as Exxon. Like Exxon, Chevron is a dividend aristocrat by way of a payout increase streak spanning 27 years. Chevron, also a Dow component, suspended its share buyback plan earlier this year, prompting some concern about the steadiness of the dividend increase streak. [A big if for a big Energy ETF]
Profit expectations have fallen dramatically which in turn has pushed the sector’s P/E ratio much higher even as stock prices have declined, though P/Es have come off their highs and estimates appear to have stablized,” according to AltaVista.
Energy Select Sector SPDR
