by Lawrence Meyers | August 2, 2011 1:57 pm
Warren Buffet once was asked what the ideal time frame is for holding a stock. He replied, “forever.” I got into a heated exchange about the validity of this statement with a friend the other day — to the point where we were waving our arms and raising our voices. I said there are some stocks you can hold forever. My friend disagreed.
I listed the following: ConocoPhillps (NYSE:COP), Exxon Mobil (NYSE:XOM), British Petroleum (NYSE:BP), and Chevron (NYSE:CVX). My thesis was simple: the world always will need oil. Virtually everything runs on oil, and always will. No matter what the environmentalists say or do, oil will rule. And the world always will have plenty of oil.
According to various sources within the oil industry, world oil demand has been increasing at an average rate of 1.76% per year since 1994. Demand might surpass supply by 2015. The U.S. alone consumes 20.7 million barrels daily. Emerging country demand also continues to grow.
I chose the four big oil producers for several reasons. First, they make gobs of cash no matter what the price of oil is. In 2010, ExxonMobil produced $48 billion in cash flow against only $260 million in interest payments and $12 billion in debt. Chevron produced $31 billion in cash flow against $11 billion in debt. ConocoPhillips chugged out $17 billion in cash flow in 2010 against only $1.2 billion in interest and $27 billion in debt. Believe it or not, even much-hated BP generated $13.6 billion in cash flow against $45 billion in debt, and they usually run $27 billion to $40 billion in annual cash flow. And that was including the Deepwater Horizon incident.
Meanwhile, all of them have rock-solid balance sheets. ExxonMobil carries $13.2 billion in cash, BP has $20 billion and Chevron has $14 billion (ConocoPhillips doesn’t release that information).
Need some more reasons? How about generous long-term dividends? Even BP, again despite the Gulf debacle, reinstated its 1.8% dividend, Chevron yields 3%, Conoco yields 3.6%, Exxon pays 2.4%. I can’t emphasize enough the compounding power of reinvested dividends. Chevron, for example, has seen its stock return 2,800% since the late 1960s. But add in reinvested dividends, and that return becomes 18,000%. Never dismiss that few dimes of cash per share as being worthless — especially not when you are holding a stock “forever.”
You might ask if there was only one stock to buy of these four, which would be best choice? If comparing these stocks to each other, both Chevron and Conoco both trade at 4.7 times the EV/EBITDA ratio. Deep value investors, however, may take a gander at BP and notice that the stock still is 25% below its pre-spill high. There is an argument that BP has further upside because of the selling that took the stock down so far.
My friend asked if I really meant “forever, as in forever.” I replied, “Let’s call it a generational hold. You can hold it for a generation — 30 to 50 years.” He smirked. “That isn’t forever.”
To me, it sure is!
Lawrence Meyers uses the fundamentals of reason when analyzing stocks, as taught to him by his extraordinary math teacher. He is long BP.
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