1 Warren Buffett stock to buy hand over fist and 1 to avoid

Buffett has been selling Chevron, but you might want to buy it. And you might want to hold off on buying Occidental even though Buffett bought it.

| More on:
Buy and sell written on silver cubes on a stock market chart.

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

If there's one person in finance that almost everybody knows about it's probably Warren Buffett, the CEO of Berkshire Hathaway. His long-term investment success is nothing short of incredible.

Recently he's been selling Chevron (NYSE: CVX) and buying Occidental Petroleum (NYSE: OXY), but you should probably stick with Chevron. And maybe avoid Occidental Petroleum.

Here's why Buffett's decision is fine for him, but probably not right for your portfolio.

The energy sector is volatile

Before getting into the differences between Chevron and Occidental Petroleum (usually just called Oxy), it's important to discuss the broader energy sector within which they operate.

Oil and natural gas are commodities known for dramatic and often swift price swings. A great many things can impact energy prices, including supply, demand, economic growth, recessions, and geopolitical events. When oil prices rise, energy companies like Chevron and Oxy tend to perform better on the top and bottom lines. When energy prices fall, the reverse is true.

That said, some companies have proven better able to handle the industry's swings. Many of them are integrated energy companies.

Both Chevron and Oxy would be classified as integrated, with assets that span from the upstream (energy production) through the midstream (pipelines) and to the downstream (refining and chemicals). Each of these segments of the industry performs differently at different points in the energy cycle. When put together, they tend to soften the swings.

Chevron and Oxy are not interchangeable

Here's the thing. Chevron is an industry giant sporting a market capitalisation of around $270 billion. Occidental Petroleum is large, but still much smaller than Chevron, with a market cap of roughly $50 billion. Oxy has material aspirations to be a bigger player, which is why Warren Buffett invested in the business in the first place, helping the company beat Chevron in a bidding war for Anadarko Petroleum.

Recently, Buffett has been buying Occidental while selling Chevron (he still owns them both; he's just shifting between the two), suggesting he sees more long-term appeal in the smaller but growing energy company.

However, there's a major caveat for average investors. Oxy's approach is extremely aggressive. It took on too much debt when it bought Anadarko and ended up having to cut its dividend when oil prices tumbled shortly thereafter. Chevron, by comparison, has increased its dividend every year for 37 consecutive years. That's an incredible record in an industry that's known for its volatility.

Notably, Chevron also has an attractive 4.4% dividend yield. That's well above the 1.6% you'll collect from Occidental Petroleum and the 3.3% of the average energy stock, using Energy Select Sector SPDR ETF as an industry proxy. In fact, Oxy's dividend still hasn't recovered to its pre-cut level.

To be fair, the upheaval after the Anadarko acquisition has resulted in management operating more conservatively. For example, debt reduction was a prime talking point when it announced its more recent acquisition of Crown Rock (a much smaller deal). But the fact still remains that Chevron is in a stronger financial position than Oxy.

CVX Debt to Equity Ratio Chart

CVX Debt to Equity Ratio data by YCharts

In fact, Chevron has one of the lowest debt-to-equity ratios in the integrated energy arena. For most small investors, it simply makes more sense to buy a large, diversified energy company with a long track record of dividend growth supported by a strong balance sheet, especially if you compare it to a smaller peer with more leverage and a history of dividend cuts and overreaching.

What's good for Buffett may not be good for you

Warren Buffett's portfolio is gigantic and he is holding on to a huge cash position. He can afford to take risks that small investors probably shouldn't.

For conservative income investors, Occidental Petroleum is that risky, smaller company.

If you are looking for a reliable dividend stock in the energy patch, Chevron and its above-industry-average 4.4% yield is very much worth buying and holding for the long term.

This article was originally published on Fool.com. All figures quoted in US dollars unless otherwise stated.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Berkshire Hathaway and Chevron. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has recommended Occidental Petroleum. The Motley Fool Australia has recommended Berkshire Hathaway. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on International Stock News

A man with a beard and wearing dark sunglasses and a beanie head covering raises a fist in happy celebration as he sits at is computer in a home environment.
International Stock News

Prediction: Nvidia Will Beat the Market. Here's Why

The world's leading GPU maker is still a solid investment.

Read more »

A TV remote in focus with a screen of Netflix options in the background.
International Stock News

Can Netflix Stock Continue to Soar in 2025?

Some technology stocks have proven resilient through the ups and downs of 2025.

Read more »

A delivery man wearing a cap and smiling broadly delivers two boxes stacked on top of each other at the door of a female customer whose back can be seen at the edge of a doorway.
International Stock News

Why Amazon stock gained 11% in May

Let's take a look.

Read more »

A person sitting at a desk smiling and looking at a computer.
International Stock News

Prediction: Nvidia Stock Will Soar in 2025 (and It's Due to This 1 Number)

Nvidia (NASDAQ: NVDA) has already delivered spectacular gains for investors, advancing more than 1,400% over the past five years.

Read more »

AI written in blue on a digital chip.
International Stock News

Better artificial intelligence stock: Nvidia vs. AMD

Let's examine.

Read more »

A woman sits at her computer with her chin resting on her hand as she contemplates her next potential investment.
International Stock News

Why Meta Platforms stock jumped 18% in May

Here's what could be next for Meta.

Read more »

A woman holds a soldering tool as she sits in front of a computer screen while working on the manufacturing of technology equipment in a laboratory environment.
International Stock News

Is Nvidia a Buy?

Here's a look at Nvidia's latest quarterly earnings and management's outlook.

Read more »

A tech worker wearing a mask holds computer chip up to the camera.
International Stock News

Is Nvidia Stock a Buy Now?

Nvidia (NASDAQ: NVDA) may be the most watched stock in the market.

Read more »