Nobody likes to overpay for a stock, which is basically buying high (which, in turn, suggests that you might be forced to sell low). That's why trying to find cheap stocks -- perhaps "value stocks" is a better term -- is such a tried-and-true investment approach. Right now there are a number of incredibly cheap stocks available in the energy industry, and ExxonMobil (XOM +0.23%) and Dominion Energy (D +1.66%) are two that are worth a closer look today.
An industry giant starts to turn
Check out the latest ExxonMobil earnings call transcript.
Exxon is one of the largest integrated energy companies on the planet. It has operations around the world, spanning the upstream (drilling) and downstream (refining and chemicals) sectors. Today it offers a yield of 4.5% (it hasn't been this high since the mid-1990s). Its price-to-tangible-book value, meanwhile, hasn't been as low as it is now since the early 1990s. Exxon is decidedly cheap.
Image source: Getty Images.
But that relatively low price doesn't do justice to the company's financial strength. Long-term debt makes up less than 10% of its capital structure. That's not an anomaly; Exxon has always been run very conservatively. The company, by design, has the diversification and financial strength to survive through the regular ups and downs of the volatile oil business while continuing to reward investors with regular dividend hikes (its annual streak is up to 36 years). At the same time, it's able to to keep investing in its future along the way.
XOM Dividend Yield (TTM) data by YCharts.
That's an important factor today, because Exxon has been struggling with falling production. That's a key reason why investors are so down on the shares. But an important turning point could be developing. Production increased during the third quarter thanks to growth in its U.S. onshore drilling division. That's just one of several key projects Exxon has in the works today. As more of its projects come on line, investors will likely start to see Exxon in a different light and reward the shares with a higher valuation. If you get in now, you can collect a hefty yield while you wait for this giant ship to turn itself around.
One step at a time
Check out the latest Dominion Energy earnings call transcript.
Dominion Energy is one of the largest energy companies in the United States. A significant portion of its business is owning and operating regulated electric and natural gas utilities. These provide a highly stable revenue stream in which the company gets a monopoly in exchange for the government having the power to dictate the prices it can charge customers. Dominion also owns fee-based businesses, including things like clean energy merchant power assets and midstream pipelines. These operations are also stable cash producers, usually backed by long-term contracts.
The stock currently yields around 4.8%, a level it hasn't reached since the deep 2007 to 2009 recession. Its price-to-earnings ratio, meanwhile, is about 14, well below its five-year average of nearly 25. The P/E is also below the levels of Southern Company and Duke Energy, Dominion's closest industry peers. Dominion looks pretty cheap today.
D PE Ratio (TTM) data by YCharts.
The diversified utility has had a lot balls up in the air lately. That includes two important acquisitions and a number of notable construction projects. But the complexity is starting to wane. Last year it brought a liquefied natural gas export facility on line without any major troubles. In early January, it completed the acquisition of SCANA. And management is hoping to close on its purchase of Dominion Energy Midstream Partners in the first half of the year. The last really big item outstanding is the Atlantic Coast Pipeline, a natural gas pipeline that is currently facing pushback from regulators. But, so far, Dominion has been successful at moving this project slowly forward despite the headwinds.
In other words, Dominion has largely been delivering on itspromises. That includes the expectation of 10% earnings growth in 2018 and a similarly large dividend hike. To be fair, the company has a lot of debt today, with long-term debt making up around two-thirds of the capital structure. However, as a utility with regulated and fee-based assets, that's not unreasonable. Investors are worried right now because Dominion has been spending a lot of money on acquisitions and investment, but that issue should wane as more of management's plans come to fruition -- which is starting to happen right now. If you can think long-term, this utility with a 15-year history of annual dividend hikes looks like it's on sale.
Everyone likes a bargain
Finding cheap stocks is actually kind of easy on Wall Street. Finding cheap stocks that are worth buying is the hard part. Giants ExxonMobil and Dominion Energy are both looking pretty cheap today. And, equally importantly, they both look like they are worth buying. Yes, they are working through some issues, but it increasingly looks like they are putting their problems behind them. Act now and you can collect fat yields from these cheap stocks while you wait for other investors to realize just how much progress has been made.
