The ever-decreasing oil prices are contributing to lower stock prices through last week and the beginning of this week. I’ve decided to take advantage of some lower prices to buy a couple of stocks with my Sharebuilder purchase – read on to see what and why!
Here’s my portfolio as of 12-December, showing the sectors and their current weights. The Energy sector is the lowest (again), followed by Healthcare then Communications. All three sectors are at 9.3% of my total portfolio and my approach of buying the lower weighted sectors is gradually levelling them out.
I’m using my dividend investing rules to guide my selection, however rather than focus solely on the lowest sector this week, I’ve decided to look at the stocks I own from the three sectors which have a negative cost basis.
I’ve excluded one stock that I own from the following list – Halyard Health (HYH) which I gained as a spinoff from KMB. They do not pay dividends and I will not be adding to this position.
|Symbol||Sector||Cost Basis ($)||Market Value ($)||Capital Gain (%)|
So stocks with negative capital gains are XOM, CVX, VDE (Energy) as well as T and VZ (Communications).
1 Month Total Returns for the Energy sector are -5.45 % which is the lowest of all 11 stock sectors – the next highest sector is Basic Materials at -1.95%. The Communications sector is third lowest performer at 0.76%.
Exxon Mobil (XOM) is the world’s third largest company valued by its market capitalization of $366B, 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 projected yield of 3.2%. 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 11.2 is above than the industry average of 9.5 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 3.4%, adjusted 0.6% down from last month’s estimates.
Chevron (CVX) is the third largest energy company by market cap at $193B, 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 4.2%. Its Payout Ratio is currently 34%, 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 higher valuation than its industry with a PE of 9.7 vs. 9.5 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 5.2%, down 0.2% 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 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%.
Vanguard have posted their estimated year-end distributions which includes an estimated dividend of $2.27 for VDE which is about 2.2% excluding December’s return. The final declaration will be made later today.
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.
AT&T (T) is the third largest communications company in the world, below Verizon (2nd place) and China Mobile (1st place) with a market capitalization of $166B. It operates in three segments – Wireless, Wireline (landline and cable) and Other although the latter segment is only 1% of all revenue. It is additionally seeking growth through its Digital Life home automation service where it competes with Comcast among others, although the home automation industry is pretty fragmented due to lack of common standards.
T is a dividend Champion having increased its dividend for the last 30 years and it currently pays a dividend of $0.46 per share for a yield of 5.7%. It has been consistent in dividend increases; increasing them in January each year since 2004. Its current TTM payout ratio of 56.3% is similar to last year and 2010, although the ratio increased to 264% in 2011 reducing down to 141% in 2012 due to low earnings. The last 5 years’ annualized dividend growth from 2009 to 2014 is 2.3%.
Its P/E of 10.0 is below the industry average of 14.7 and S&P 500 average of 18.7. With the exception of the low income 2011 and 2012, the P/E has been substantially below the S&P average so this year is no exception. T has low growth forecasts – its 5 year EPS growth estimate is 4.6%, unchanged from October.
Verizon (VZ) is the larger rival to A&T in what amounts to a duopoly in the US with a combined 70% market share of the wireless market. It has a $189B market capitalization. Similar to AT&T, it’s organized primarily into Wireless and Wireline segments.
VZ has been promoted this year to a Dividend Contender, having increased its dividend for the last 10 years. Its current dividend of $0.55 gives it a yield of 4.8%. It has been increasing dividends consistently in October since 2009 and annualized dividend growth over the last 5 years is 4.2%. Its TTM payout ratio is currently 46.2% and has been greater than 100% for four years from 2009 through 2012, reaching a high of over 600% in 2012.
VZ’s P/E of 10 is similar to AT&T’s P/E, being below the industry average of 14.7 and the S&P’s 18.7. For the most part over the last ten years, the P/E has been higher than the S&P average, but starting last year its P/E has been quite a bit lower than the S&P and that trend is continuing this year. Projected EPS growth over the next 5 years is 8.3%, up 1.3% from October.
What to buy?
Looking at all 5 companies, my criteria of requiring a projected dividend income being less than 5% for any stock excludes CVX and T
The remaining three stocks (VZ, XOM and VDE) meet all my minimum criteria.
VDE scores lowest of the three because of its lower dividend yield, which while growing at an annualized 13% a year for 5 years is behind XOM’s 3.2% which has grown its dividend almost as much with 10.2% growth. VZ’s dividend growth is much less, around 4%, but its higher initial rate will take some catching up.
Here is the comparison visually.
Stock Purchase this week
This week I decided to split my $300 Sharebuilder purchase between VZ and XOM, to take advantage of a cheaper VZ as well as continue to average down in XOM.
Total purchases this week are:
- XOM (1.6898 @ $88.768 = $150)
- VZ (3.2534 @ $46.105 = $150)
These investments should increase my yearly dividend income by about $10.
Full disclosure: I am long XOM, CVX, VDE, T, VZ, PFE, JNJ & HYH.
Quote of the day
The best intelligence test is what we do with our leisure.