This Sector Is a Trader’s Best Friend

January 27, 2023

An easy trade just got even easier.

The energy sector has been red-hot. Demand continues to outstrip supply, and the problem appears to only be getting worse.

And now there’s a new catalyst – and it’s a slap in the face to members of the political class who don’t like the windfall the energy sector (and its investors) is sitting on.

On Wednesday, Chevron (CVX) announced something big. It’s tripling the size of its previous buyback plan… and promising to purchase a whopping $75 billion worth of its own shares on the open market.

With Chevron’s market cap at $345 billion, that represents more than 20% of the company’s current value.

That’s big.

Within the next few years – maybe even sooner – the company will pull 1 of every 5 shares off the market.

This move creates an incredible layer of protection for shareholders. Yes, oil prices can go down. And yes, profits may dip from these record highs. But the cut of the profits that each share represents will increase thanks to these buybacks.

Pushing other variables aside, once the buybacks are complete, the company’s profit would need to drop 20% before EPS would dip below today’s level.

Add in Chevron’s just-increased dividend – which is now approaching a 4% annual yield – and you can see why I’m excited about the energy sector.

It’s an easy trade.

Chevron’s announcement comes just weeks after the Inflation Reduction Act’s 1% tax on buybacks kicked in. The new regulation doesn’t seem to be curtailing activity. But at least now Uncle Sam is getting paid alongside shareholders.

Washington will pull in nearly a billion bucks from Chevron’s move alone… plus it’ll get to tax any gains individual shareholders make from it.

And it’s not just Chevron that’s rewarding shareholders (and adding to Uncle Sam’s coffers).

So far this year, two other major companies have announced fresh buyback plans.

A company that moves a lot of product for Chevron, pipeline operator Kinder Morgan (KMI), just announced a $1 billion deal of its own. It will pull some 2.4% of its shares off the market… and reward investors with a nearly 6% dividend.

Outside the energy sector, health-tech giant Agilent Technologies (A) launched a brand-new repurchase plan that aims to pull 4.4% of its shares off the market. The move will cost $2 billion.

It’s no surprise that all three of these companies have not just beaten the S&P 500 over the last year… but also managed to increase in price while the benchmark index has slumped by nearly 8%.

It proves the power of buybacks.

And with Chevron leading this trio with a near-40% gain over the last 12 months, it proves the strength of the energy sector.

It’s a trader’s best friend these days.