It’s coming up to the automatic sharebuilder purchase deadline and currently the Energy sector is the lowest valued in my Portfolio so I’m looking to give it a boost. It was touch and go with the Industrial sector last week but the recent market dip hit my Energy stocks more. Here’s a roundup of the Energy sector stocks in my portfolio as well as some new candidates as I consider what to purchase next.
The Energy sector consists of companies involved in the production of energy sources, as opposed to the Utilites sector which is more about the distribution of energy. The sector covers companies drilling for oil, gas and coal for the most part. The industry as a whole is capital intensive since it costs a lot of money to find, acquire and develop an oil or gas field.
YTD Total Returns for the entire sector are 14% which is the second highest of all 11 stock sectors (Utilities win first place at 18%) so it’s been on a roll as of late.
Here’s my portfolio as of 03 August grouped by market sector. Energy is my lowest valued sector and it, along with the Industrials sector, is outside the +/- 10% rule I made.
My Energy sector dividend stocks
I currently have positions in XOM and CVX in the Energy sector plus the VDE ETF.
Exxon Mobil (XOM) is the world’s second largest company valued by its market capitalization of $421B, beaten only by Apple. It operates in three segments – Upstream (oil & gas extraction), Downstream (refining and processing) and Chemicals (manufacturing of a wide range of industrial chemicals). It has a major focus on oil, but it is expanding in liquid natural gas. Its latest LNG facility in Papua New Guinea which has just come online with its first shipment last month. It’s also undergoing a major stock repurchase plan and is providing shareholder with a lot of money through dividends and stock buybacks.
Exxon is a dividend Champion having increased its dividend for the last 32 years and it currently pays $0.69 for a yield of 2.7%. It has been consistent in dividend increases; increasing them in May each year since 2006. Its current TTM payout ratio of 34% is above its typical range of 20-30% although it reached 41% in 2009. The last 5 years’ annualized dividend growth from 2009 to 2014 is about 10%.
Its P/E of 13.4 is above than the industry average of 12.9 but below the S&P 500 average of 18.2. Over the last ten years, the P/E value has been consistently lower than the S&P average; and typically falling in a range from 9 to 15. XOM is a mature company, reflected by its projected 5% EPS growth of 4%.
Chevron (CVX) is the third largest energy company by market cap, falling behind Exxon and Royal Dutch Shell but ahead of British Petroleum. Like Exxon its two of its main operating segments are Upstream (28% of revenue) and Downstream & Chemicals (72% of revenue) with most income coming from the Upstream facilities, many of which are outside the US. In the short term its production growth is limited but it has mid and longer term projects in place to grow. On average over the last three years, it has increased its reserves of oil and gas by 123% of its annual production.
CVX has increased their dividend each year for the last 27 years and have a consistent pattern with dividend increases arriving each May since 2005. The dividend is currently $1.07. giving a yield of 3.3%. Its TTM Payout Ratio is currently 39%, higher than the typical value of 20 to 35 with the exception of 50% that was reached in 2009. The dividend growth over the last 5 years is an annualized 9.6%.
CVX has a lower valuation than its industry with 12.5 vs. 12.9 and it’s also lower than the S&P average of 18.2. Like XOM, its valuation has been significantly lower than the S&P average every year since 2004, although the gap has been narrowing slightly over the last 3 years. Its projected EPS growth over the next 5 years is 5%.
Vanguard Energy ETF (VDE)
I have a small position in Vanguard Energy ETF (VDE). I actually like ETFs in the sense that they’re lower risk since they hold more stocks than I can possibly manage and because they trade commission-free, they’re a cheaper way to get into investing. On the flip side, the fund isn’t focused on dividend stocks (although pays one annually), so it has a lower annual yield of around 1.6 to 1.8% with an Expense Ratio of 0.14%.
In VDE’s case, it holds a total of 161 stocks in its current portfolio. Via this ETF I own shares in Schlumberger, Occidental Petroleum, Kinder Morgan and many other divided champions that I don’t hold individually.
Other energy stocks
I have 3 positions in this sector in my portfolio, so I’m going to look at some new dividend paying stocks to see if there is something better I could purchase instead of adding to my current positions.
My usual high level screener applies as I start from the Dividend Champions list. Remember to download the latest version of the list since it’s updated monthly.
- Include only stocks from Champions, Challengers and Contenders filtered by the sector I’m interested in (Energy)
- Include only stocks with a dividend yield above 2%
- Exclude ADRs and non-US companies
- Include only the Oil & Gas industry in the selection
ConocoPhillips (COP) is a smaller energy company that’s ‘only’ $94B in size. It is focused on Exploration and Production and does not have the Downstream refining segments that CVX and XOM have, forming a separate spin-off company Philips 66 (PSX) for those activities. For another take on COP, see Dividend Family Guy’s analysis.
COP has increased its dividend for the last 14 years. Its current dividend of $0.73 gives it a yield of 3.5%. It pays dividends somewhat consistently although it used the alternate-year method to increase dividend income in 2012 after a stock-split. Since then it looks like July is the new increase month. Its TTM payout ratio is currently 42%. In 2008 COP reported a large loss so there was no payout ratio value. From 2009 onwards however, the payout ratio ranged from 20% to 44% so the current ratio is towards the upper limit. Annualized dividend growth over the last 5 years is 14.3%.
COP’s P/E of 12.4 is well below its industry average of 31.1 and the S&P’s 18.2. Historically the P/E has always been significantly lower than the S&P average and it continues that trend this year although, as with CVX, the gap has been narrowing. Its projected EPS growth for the next 5 years is 7%.
Helmerich & Payne
Helmerich & Payne (HP) is an $11B company. It’s a contract oil drilling company organized into three segments: US Land, Offshore and International Land with major customers being Occidental Oil & Gas, Devon Energy and BHP Billiton.
HP is another dividend Champion with a dividend growth history of 42 years. Its shares currently give a yield of 2.5% from a dividend of $0.69 per share. It has an inconsistent increase pattern, using alternating years and in August 2013 significant dividend increases from the previous levels. Consequently the current payout ratio of 25.4% is a marked increase over the former single digit payout ratios since 2005. Note that low earnings in 2004 gave a payout ratio of over 358%. The change in payout ratio is reflected in the dividend growth over the last 5 years which is currently 64%.
Its P/E of 15.1 is higher than the industry average (9.1) but lower than the S&P Average of 18.2. The P/E has always been higher than the S&P’s average for most of the time since 2004 (except 2004, 2005 and 2010). Its projected EPS growth over the next 5 years is 16%.
Williams Companies (WMB)
Williams Companies (WMB) is a $38B natural gas processing and transportation company. In June it announced plans for acquiring the remaining 50% of its partnership in ACMP for $6B.
WMB has increased its dividend for 11 years. The current dividend of $0.425 gives a yield of 3%. It has a very inconsistent pattern of dividend increases, increasing dividends each quarter since 2011. Payout ratio is a cool 295.6 percent and it’s been over 100% since 2011. Dividend growth has been 36% over the last 5 years.
WMB’s P/E is 104 and much higher than the industry average of 42.0 and the S&P average of 18.2. Historically the P/E has been mostly higher than the S&P average with the exception of 2008 and 2010. Projected EPS growth for the next 5 years is 6.2%
I’m excluding MLP’s from my selection despite their higher yield, and also ADRs. So I’m not covering some of the popular dividend income stocks such as Kinder Morgan Energy Partners (KMP) and Enbridge (ENB). I don’t understand enough of the tax implications and structure of these investments at present so I avoid them. As a regular stock, KMI would be interesting to me except that it hasn’t reached the 5 year dividend history requirement that I have.
Likewise British Petroleum (BP) is excluded by my dividend screener since it’s not a dividend champion, having cut its dividend entirely in May 2011 after the Deep Horizon oil spill. That said, it no doubt has learned plenty of lessons in risk management since 2011 and may well be a good alternative.
What to buy?
The Vanguard VDE ETF fails my 2% dividend income requirement with its expected 1.6% yield so it has to sit this one out. Of the remaining 5 stocks all exceed my criteria requiring a 3% dividend growth rate.
WMB is eliminated because of its high Payout Ratio. It would have scored fairly low on my scale too being penalized for dividend inconsistency and small size. While the dividend growth rate is high and management are giving guidance for an estimated 4 year CAGR of 23%, it’s too much of a risk for me so I’m avoiding this one.
So that still leaves 4 companies. Using a forward projection of the earning potential of their dividend yield vs. dividend growth ranks the highest earning stock as COP, then CVX, then HP and finally XOM.
XOM, CVX and HP gained additional credit due to their size and dividend history, however I’ve decided to stick with CVX, a stock that I already own, this time around.
COP scored lowest due to inconsistent and shorter dividend history and a smaller market cap, despite its higher yield. I do put an emphasis on a stable payment with a predictable increase pattern. HP was next, losing for similar reasons for small size and stable payments although it did get extra credit for its long dividend history. It does have a lower yield than the other 3 companies, I’m just not willing to take a risk on its future growth when there are more solid companies to chose from. Between XOM and CVX it really came down to current yield as both companies are equally solid in my opinion.
Here’s the outcome visually.
The score column shows the ranking I’m using and summarizes my analysis, it’s calculated from a weighting of the different criteria added together and aids me in valuing one stock over another. It tends to favor higher yields and stable payments.
My purchases this week
So total purchases this week will be:
- $350 Individual Stocks (CVX)
This purchase should increase my yearly dividend income by about $10 and it’ll happen Tuesday from my Sharebuilder account. I’m actually quite happy about the recent dip as I was considering to buy CVX when it was priced at $130 a couple weeks back then decided not to and the price rose to $134. It’s now back down to $127.
Full disclosure: I am long XOM, CVX, & VDE.
Sources: Morningstar, Finviz & Yahoo Finance. While every attempt is made for accuracy, mistakes can happen. Please conduct your own research and due diligence before making any stock purchase. Your investing goals and criteria for stocks are likely different than mine.
Quote of the day
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