Energy stocks have taken a tumble of late, with reports of lower oil prices going forward due to excess supply and stagnant global recovery. The price of crude oil reached 2010 levels last week at around $83 a barrel. With the recent stock market dip, it’s not too surprising that it’s my lowest weighted sector this week. So it’s time to buy some more – will this month be any different than my purchase of CVX last month?
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 (4%+) 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 third highest of all 11 stock sectors (Utilities remain at first place with 15.19% then Real Estate) so no change in position compared to last month.
Here’s my portfolio as of 17 October grouped by market sector. Energy is my lowest valued sector although it’s still within my +/- 10% rule.
This month marks the first month since I started writing where the Technology sector is not my highest sector; last week’s Emerson purchase pushed the Industrials sector to the top, dislodging Technology which consists of Microsoft and Intel.
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 $389B, 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 3.0%. 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 11.6 is above than the industry average of 10.9 but below the S&P 500 average of 18.4. 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 year EPS growth of 3.6%, adjusted 0.7% up from last month’s estimates.
Chevron (CVX) is the third largest energy company by market cap at $212B, 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 3.8%. 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 10.7 vs. 10.9 and it’s also lower than the S&P average of 18.4. Like XOM, its valuation has been significantly lower than the S&P average every year since 2004. Its projected EPS growth over the next 5 years is 5.7% unchanged from last month.
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 (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 4.3%. 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 38%. 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 10.5 is well below its industry average of 28.1 and the S&P’s 18.4. Historically the P/E has always been significantly lower than the S&P average and it continues that trend this year, even increasing the gap so far this year based on its current lower price. Its projected EPS growth for the next 5 years is 7.3%.
Helmerich & Payne
Helmerich & Payne (HP) is an $9B 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 3.2% 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 13.2 is higher than the industry average (8.1) but lower than the S&P Average of 18.4. 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 $0.56 gives a yield of 4.3%. It has a very inconsistent pattern of dividend increases, increasing dividends each quarter since 2011. Payout ratio is a cool 331 percent and it’s been over 100% since 2011. Dividend growth has been 40% over the last 5 years.
WMB’s P/E is 98 and much higher than the industry average of 38 and the S&P average of 18.4. 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%.
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 4.7%. It has been increasing dividends frequently, typically multiple times per year although for less than 5 years. Payout ratio is currently 139 percent and it’s been over 100% since 2012, having started in 2011 with an 89% ratio.
KMI’s P/E is 31.7, below the industry average of 38.2 but above the S&P average of 18.4. 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 9%, down 1% from last month.
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 1.8% 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 and yield is high, I do question how long it can keep that up with its current income.
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 HP, CVX and finally XOM. KMI would be #1 rated by far in this criteria due to its high yield and growth.
Overall rating wise, 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. XOM was next, its lower 3% yield marking it down compared to the CVX and HP. HP was second; although its dividend yield of 3.2% is comparable to XOM’s, its projected EPS growth was much higher giving it a higher score. CVX was top by a fairly wide margin with a nearly 4% yield and great track record.
However CVX is currently outside my 5% dividend income rule (CVX pays me about $42 a year out of total stock dividends of around $734) so I decided to add to my position in XOM this month instead. To be honest, the rule doesn’t make a lot of difference at this point since my stock holdings are fairly small but I’d rather get into the habit now, and as my stock purchases increase this rule will become less limiting.
As for HP, I don’t believe that they will really have a 16% annualized EPS growth over the next 5 years as the analysts at FinViz suggest and so I’d rather stay with a more stable company for the long term.
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:
- $300 Individual Stocks (XOM)
where the XOM shares are via an automatic trade from my Sharebuilder account.
This purchase should increase my yearly dividend income by about $9 and it’ll happen Tuesday. I last bought XOM at $94.7 back in March so it’s a little cheaper currently at around $91.6 today.
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
I can’t change the direction of the wind, but I can adjust my sails to always reach my destination.