This is hopefully my last catch-up post and reflects my automatic Sharebuilder purchase last week on December 2nd. Given the latest collapse in oil prices, it’s perhaps not surprising that the Energy sector became the lowest weighted in my portfolio. The sector dropped past both Utilities and Healthcare in just one week.
Energy Sector stocks
The Energy sector consists of companies involved in the production of energy sources, as opposed to the Utilities 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 this week are -0.57% which is the third lowest of all 11 stock sectors and only manages to beat the Consumer Cyclical and Basic Materials sectors. At 8.7% of my total portfolio, the Energy sector is my lowest valued sector and outside my current target of 10% +/- 1%.
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 third largest company valued by its market capitalization of $397B, beaten only by Apple and as of this November, Microsoft. 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 2.9%. 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 11.8 is above than the industry average of 10.6 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 year EPS growth of 4%, adjusted 0.4% up from October’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 3.9%. 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 10.2 vs. 10.6 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. Its projected EPS growth over the next 5 years is 5.4%, down 0.3% from October’s estimates.
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 it pays a distribution annually), so it has a lower annual yield of around 1.6 to 1.9% 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.
What to buy?
The Vanguard VDE ETF fails my 2% dividend income requirement with its estimated 1.9% yield so I’m skipping that as an potential selection this week.
My shares in CVX are currently contributing more than 5% of my dividend income, so I’m not going to add to CVX at this time either.
This leaves XOM as the sole surviving candidate for my Sharebuilder purchase.
I expect further price erosion for all three stocks going forward, but I believe in the long term and that they’ll continue paying dividends until oil prices inevitably go back up. In the meantime it’s a good opportunity to grab a ~3% yield.
I spent $300 to buy 3.2039 shares of XOM at $93.63; this is a little higher than my last purchase in October of $92.5. This purchase should increase my yearly dividend income by about $9.
Full disclosure: I am long XOM, CVX, & VDE.
Quote of the day
Formula for success: rise early, work hard, strike oil.