March Purchase #4 – Energy sector

Last Tuesday I made my 4th Sharebuilder automatic purchase in March and I decided to add to existing positions in the Energy sector. There’s another purchase opportunity this week since there are 5 Tuesdays in the month, however I’m not making an additional purchase this week.

The energy sector

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 is very 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.

YTD Total Returns for the entire sector at the moment are 0.3% which is the fourth from bottom, beating only the Technology, Basic Materials and Financial Services sectors.

My energy stocks

I currently own positions in XOM, CVX & VDE in the Energy sector.

Exxon Mobil

Exxon Mobil (XOM) is the world’s fourth largest company valued by its market capitalization of $354B, beaten by Apple, Google and Berkshire Hathaway. 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 3.3%. It has been consistent in dividend increases; increasing them in May each year since 2006. Its current TTM payout ratio of 36% 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 11.1 is below the S&P 500 average of 19.5. 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, low-growth company and its projected EPS growth over the next 5-years has been marked down to -1.2% due to the low-price of oil.

I calculated XOM’s Free Cash-Flow Payout Ratio which I define as total dividend expenses dividend by the Free Cash Flow over the last twelve months. In XOM’s case the FCF was $12B and with a dividend payment of $11B, this gave a 97% payout ratio. This seems high compared to the more common EPS based P/O Ratio of around 36% – XOM’s actual operating FCF is much higher at $45B; the FCF value excludes $33B of capital expenses.

XOM has a great credit rating with an Aaa rating at Moodys.

Chevron

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 has a consistent schedule with dividend increases arriving each May since 2005. The dividend is currently $1.07 giving a yield of 4%. Its TTM Payout Ratio is currently 42%, 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 the S&P average of 19.5 with 10.6. 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 -1.7% due to the current pricing conditions in the energy market.

Compared to XOM’s Free Cash-Flow, CVX doesn’t look as good. Its Operating FCF is $31B and it spent $35 in Capital Expenses over the last 12 months, resulting in a negative $4B cash-flow to add to last year’s negative $3B. So calculating the P/O Ratio results gives -200% since dividend expenses were $8B. So that’s not a great number either, but what CVX does has is $13B cash that it’s been slowly using over the last 3 years.

CVX has a great credit rating with an Aa1 rating at Moodys.

Vanguard Energy ETF (VDE)

I have a small position in Vanguard Energy ETF (VDE). I 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 162 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.

Choosing new stocks to consider

I only looked at stocks that I currently held in my portfolio this week.

What to buy?

I didn’t want to add to the ETF this week – both XOM and CVX remain long-term dividend payers and have sufficient resources to maintain their dividend through the current drop in oil prices. With even more instability in the middle-east of late, it’s likely that oil prices will rise again.

I chose to add to both stocks in my Sharebuilder purchase but favoring CVX as it was underweight compared to XOM.

Here’s the outcome visually. CVX has a small advantage over XOM due to its higher yield.

#Yr Yield DivGr5 P/O% EstGr5 Projected Score Status
XOM 32 3.26 10.2 36 -1.2 17 45 Buy
CVX 27 4 9.6 42 -1.7 21 46 Buy
VDE 5 2.09 13.7 50 1 11 33 Buy

My purchases this week

So my Sharebuilder purchase on Tuesday earlier this week was:

  • 1.177 shares of XOM @ $84.9617 ($100)
  • 1.903 shares of CVX @ $105.1027 ($200)

This purchase should increase my projected yearly dividend income by about $11.

 

Quote of the day

If at first you don’t succeed, buy a dividend growth stock.

0 thoughts on “March Purchase #4 – Energy sector”

  1. good purchases I think. I missed the last dip in RDSB sadly, but chose to go in for Bloomsbury and giftgaming, as you know, instead.

    I might be starting more days at the office soon, so I am hoping that we will be able to save the majority of the extra income, and thus put it into investments. fingers crossed!

    1. Hi M,

      I liked the BMY purchase. It’s good to see that their digital / e-book business is growing too.
      More investments? More Freedom! I hope it works out and will be keeping my fingers crossed!

      Cheers,
      -DL

  2. DL,

    Great purchases! These are the only two largest oil companies that I don’t own, mainly because Europe-based oil giants offer much higher yields at the moment and because the dividends are more advantageous from a tax perspective.

    Just like M from theresvalue I missed the last dip in RDSB, but I hope to pick up some more shares in the immediate future. Let’s hope oil prices dive a little lower, so we can all enjoy a slightly higher yield on new purchases.

    Best wishes,
    NMW

    1. Hi NMW,

      Yes I do need to look outside the big two but I haven’t found something I liked enough yet. I won’t be adding more to energy for a while now, so let’s see what happens to the market until then.

      I’m all for lower prices although I don’t have any control over my purchase price because of the Sharebuilder purchase plan. But I figure that half of my purchases are below average in any case so I don’t worry about it 😉

      Best wishes!
      -DL

  3. DL,
    Nice purchases in energy sector. I also made an energy purchase (NOV) last week after a long time and looking to add to my CVX position if possible.

    PS: The CVX price is mentioned incorrectly in the post, unless you were able to get it at a super special price 🙂

    1. Hi DGJ,

      Yes I had to smile when I saw your NOV purchase last week as I had picked the Energy sector too. I’m looking forward to seeing your new purchase this week.

      I didn’t get a special discount on CVX sadly, so I’ve corrected the price now. Thanks for pointing that out!

      Best wishes!
      -DL

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