Energy sector dividend stocks – my purchase in September

It seems I was writing about purchasing Energy stocks only last month. Oh wait, I was! It’s been about 6 weeks and the Energy sector is my lowest weighted sector again. It’s interesting watching the sector weights as they change over time; Technology is my highest valued sector and it continues to outperform everything else (it’s mostly MSFT who have been on a tear this year though I’m not quite sure I get the whole Minecraft deal). So eventually as I add to all other sectors, they should catch up to overtake it but it’s taking a lot longer than I was expecting and likely another 6 months at my current rate.

This post isn’t going to be much different than my previous roundup unfortunately. But let’s take a look and see how things look this week.

Energy sector

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.

Much of the infrastructure and investment around oil and natural gas extraction is centered around Master Limited Partnerships (MLP’s). They typically have a good dividend yield but can come with some tax complications. I’m not considering MLP’s in this roundup and that reduces the available choices quite a bit.

YTD Total Returns for the entire sector are 11.83% which is the second highest of all 11 stock sectors (Utilities remain at first place with 15.19%) so no change in position compared to last month.

Here’s my portfolio as of 14 September grouped by market sector. Energy is my lowest valued sector and it, along with the Basic Materials sector, is outside my +/- 10% rule.

My portfolio as of 14-September 2014 showing Energy as the lowest weighted, followed by Basic Materials then Communications.
My portfolio as of 14-September 2014 showing Energy as the lowest weighted, followed by Basic Materials then Communications.

My Energy sector dividend stocks

I currently have positions in XOM and CVX in the Energy sector plus the VDE ETF.

Exxon Mobil

Exxon Mobil (XOM) is the world’s second largest company valued by its market capitalization of $408B, 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. It’s also undergoing a major stock repurchase strategy and is providing shareholders with a lot of money through both 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 2.8%. It has been consistent in dividend increases; increasing them in May each year since 2006. Its current TTM payout ratio of 33% 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 12.2 is above than the industry average of 12.2 but below the S&P 500 average of 18.7. 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. The gap has increased even more this year. XOM is a mature company, reflected by its projected 5% EPS growth of 2.9%, adjusted 1.1& down from last month’s estimates.

Chevron

Chevron (CVX) is the third largest energy company by market cap at $232B, 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 3.4%. 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 11.7 vs. 12.2 and it’s also lower than the S&P average of 18.7. 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 5.7%.

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.

  • 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%
  • Include only stocks with an estimated Next Year growth > 0%
  • Include only stocks with an estimated 5 Year growth > 0%
  • Exclude ADRs and non-US companies
  • Include only the Oil & Gas industry in the selection

ConocoPhillips

ConocoPhillips (COP) is a smaller energy company that’s ‘only’ $97B 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.

COP has increased its dividend for the last 14 years. Its current dividend of $0.73 gives it a yield of 3.6%. 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 12.1 is well below its industry average of 34.1 and the S&P’s 18.7. 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 7.4%.

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 2.6% 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 35% 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 67% with most of the growth occurring in the last 2 years.

Its P/E of 15.7 is higher than the industry average (9.1) but lower than the S&P Average of 18.7. 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 $42B 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 105 and much higher than the industry average of 40.8 and the S&P average of 18.7. 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 6.9%.

Kinder Morgan Inc. (KMI)

Kinder Morgan Inc. (KMI) is an energy transportation and storage company. It currently operates as a holding company, owning interests in energy partnerships but has announced plans to consolidate its holdings of KMEP, KMR and El Paso Pipeline Partners into the parent KMI company. The combined company will then own an interest in, or operate over 80,000 miles of pipeline and 180 terminals.

I’m cheating a little to include KMI in this list as it only started paying dividends in 2011 although its related KMP company has an 18 year divided history. The current dividend of $0.43 gives a yield of 4.6%. It has been increasing dividends frequently, typically multiple times per year although for less than 5 years. Payout ratio is currently 141 percent and it’s been over 100% since 2012, having started in 2011 with an 89% ratio.

KMI’s P/E is 32.6 which beats the industry average of 40.8 and the S&P average of 18.7. Historically the P/E has always been higher than the S&P average and this year’s value compares well to last year’s. Projected EPS growth for the next 5 years is 10%.

Honorable mentions

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, although it looks like it may need to put aside even more money as a result of the spill.

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 6 stocks, KMI is also eliminated because of its 4 year history.

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, its lower initial yield is giving it a similar future value comparable to more stable companies in this roundup.

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. KMI would be #1 rated by far in this criteria due to its high yield and growth.

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, the same decision I reached last month. On the plus side, it’s even cheaper this month.

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.

Yield #Yr DivGr5 P/O% Projected Stable Score Status
CVX 3.4 27 9.6 38.9 21 5 45 Buy
XOM 2.8 32 10.2 32.9 16 5 41 Buy
HP 2.6 42 67.4 35.2 19 2 39 Buy
COP 3.6 14 6.9 38 23 2 37 Buy
WMB 3.0 11 36.1 264 19 0 0 Hold
VDE 1.6 5 13.0 N/A 11 5 0 Hold
KMI 4.5 4 0 145 31 1 0 Hold

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

I’m adding to my Vanguard funds too this month as I continue investing the money from my house sale earlier this year.

So total purchases this week will be:

  • $330 Individual Stocks (CVX)
  • $400 Vanguard High Yield Corporate Bond (VWESX)
  • $500 Vanguard High Dividend Yield (VHDYX)

where the CVX shares are via an automatic trade from my Sharebuilder account.

This purchase should increase my yearly dividend income by about $42 and it’ll happen Tuesday. CVX has dropped by about 2% since my last purchase so I’m getting a little bit more for my investment which is always nice.

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.

Previous Purchase – Consumer Cyclicals

 

Quote of the day

The study of economy usually shows us that the best time for purchase was last year.

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0 thoughts on “Energy sector dividend stocks – my purchase in September”

  1. nice one DL. I do not own any of these but several have gone in and out of my spreadsheet watchlist over the years.

    Always intersting to read your perspectives from across the pond

    Cheers,

    M

  2. what do you think about the stock Suncor Energy (SU) it follows all of your screening and eps is only 29%tell me what you think its been on my radar.

    1. Hi Alex,

      I’ve not actually considered SU before, primarily because it’s an ADR and I’m sticking to US domestic stocks, but here are my thoughts about it.

      At a $56B market Cap, SU is one of the largest Canadian oil companies. They have an eight year dividend history per the Champion’s list although a quick look on their website suggests a longer streak as it seems they’ve increased their dividend since 2003. The 5 year growth estimate looks good at 8% and the dividend yield is above average at 2.5%.

      Based purely on P/E numbers, it looks more expensive relative to CVX & XOM as SU’s P/E of 17 is a fair bit higher than both companies. I guess I’d want to know what extra am I getting from this stock in return for the higher P/E compared to the industry average.

      I ran SU through my score and it came up with a result of 27; it lost points because of its lower yield, shorter dividend growth history and irregular dividend increase pattern.

      Both Morningstar (4 star rating) and S&P Capital (Buy rating) like the stock and consider it under-valued.

      Definitely worth having on your watchlist although obviously it depends on your objectives and if you favor total return over dividend income etc. It has a higher estimated 5 year growth than most of the companies in this review (KMI & HP beat it) which potentially means higher sustained dividend growth and capital gain.

      Thanks for asking!

      Regards,
      -DL

  3. Great write-up, DL! Almost all of the companies above are great businesses with steady income and dividend payments.

    Having bought Total recently I’m a bit heavy on the energy sector now, but in the future I’ll probably add some CVX, XOM, BP or RDS.

    Cheers,
    NMW

    1. Hi NMW,

      Yes, I even feel bad when companies score low as they’re still strong companies and even making it to the US champion list is a major achievement.

      Congrats on the Total purchase! It’ll be a while before I come back to Energy too; probably about 6 weeks 😉 Basic Materials is the next sector for me this coming week so that should be interesting.

      Thanks for stopping by!

      Best wishes,
      -DL

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