Everyone can learn from legendary investor Warren Buffett. CEO of Berkshire Hathaway and titan of the investing industry for decades, Buffett is a role model for many investors with his value-oriented philosophies. Putting up market-beating returns since the 1950s -- yes, that's right, the 1950s -- he has earned the moniker, "Oracle of Omaha."
It can pay to track what Buffett is buying for his investment portfolio at Berkshire Hathaway. He recently made a big bet on U.S. energy stocks, with Occidental Petroleum (OXY 5.42%) becoming one of his largest positions. If you want to invest alongside Buffett, it may be smart to buy some Occidental Petroleum stock for your own portfolio. Here's why.
A bet on U.S. energy dominance
We can't read his mind, but Buffett probably likes Occidental Petroleum for a few reasons. First, we know that he values investing in the United States over other countries due to its favorable laws for businesses and shareholder rights. It is also his home country, and therefore easier to understand compared to a faraway nation.
Contrary to popular belief, the United States is now the world's largest oil producer due to the fracking boom, and is now energy independent. The U.S. produces over 13 million barrels of oil (or natural gas equivalents) per day, up from just over 5 million after the 2008 financial crisis.
Occidental Petroleum happens to be one of the largest oil and natural gas producers in the United States, taking advantage of this boom. It also has minimal international exposure, with under 20% of its petroleum production coming from foreign soil. This makes it much less susceptible to hostile foreign governments, which have been a thorn in the side of oil companies for decades.
NYSE: OXY
Key Data Points
Cheap stock, acquiring more energy assets
One of the tenets of Buffett's investing philosophy is to never overpay for an asset. If you buy a stock at an expensive multiple of 30 times earnings, it will be much harder for it to do well compared to buying the same company at 10x earnings. Occidental Petroleum checks this box. It currently has a price-to-earnings ratio (P/E) of 12.5, which is around half the S&P 500 average.
Inverting this number, the stock has an earnings yield of 8%. What does this mean? Investors in Occidental Petroleum such as Berkshire Hathaway will get an 8% return in earnings each year by holding the stock at these prices, just as long as the company continues to earn its current annual net income. Buffett wants to bet on durable assets with high earnings yields, which describes Occidental stock.
With these earnings, Occidental management is actually buying up more energy assets in the United States to increase the cash flow coming in for shareholders like Buffett. It recently acquired natural gas producer CrownRock for $12 billion, which will add $1 billion in free cash flow generation assuming a $70 oil price (oil is currently trading at around $72). This should increase Occidental's earnings power over the long term.
OXY Shares Outstanding data by YCharts
Consistent capital returns, staying patient
Lastly, Buffett likes to bet on companies with management teams that return capital to shareholders. If you look at his largest investments, they all either have growing share repurchase programs or dividend payout programs (or both). This allows shareholders such as Berkshire Hathaway to take in some of the company's earnings each and every year.
Unsurprisingly, Occidental Petroleum checks this box off too. It has shrunk its share count by 6% in the last three years, and recently boosted its quarterly dividend payout to $0.22 per share. On an annualized basis that is a dividend yield of 1.5% based on its current share price of $57, a yield that has room to consistently grow in the coming years.
All this sounds great. But don't expect this stock to immediately rocket higher in 2024. An energy producer such as Occidental Petroleum is beholden to oil prices, which can be volatile depending on how the world economy is doing. If oil prices sink in 2024, the stock will likely do poorly.
However, for those with a long-term time horizon, Occidental looks like a promising asset in a country with a safe business environment, and it boasts rational management and a stock trading at cheap levels. No wonder Berkshire Hathaway now owns close to 25% of the company.
As his long-standing partner Charlie Munger used to say, it is not in the buying but the holding that makes an investor money. If you want to bet on U.S. energy independence alongside Buffett, now could be a great time to buy Occidental Petroleum and hold for many years.
