Looking for solid dividend returns has become an increasingly tougher task with ever less major stocks returning north of a 3% dividend yield. The sliding oil price has however pushed major oil stocks to levels not seen for quite some time and thereby boosted their dividend yields to very attractive levels. With Friday's massive surge in oil prices and a temporary bottom of $45 a barrel this might be the time to look at Big Oil for dividend investors.
While the US runaway stock market leaves the investor with very little attrative options in the mother country of the shale oil that brought about this tremendous opportunity I'll focus this analysis on European companies that boost 5%+ dividend yields that are extremely hard to get by with comparable risks as I shall show.
First of all let's have a look at the seven major oil companies that are open to the dividend seeking investor. The following table has been compiled from several sources, mostly the companies' investor relations pages and Mornigstar:
What I'm looking for here is the dividend yield for the last ten years. I've calculated that yield with the average dividend payments for 2004 through 2013 and the current stock prices. While this is obviously no guarantee for likewise payments in the future it does give you a very good proxy for the dividend paying power of the corresponding stock.
Eni and Statoil both sport trailing dividend yields of more than 7% while the rest of the European pack comes in around 5%. Chevron and Exxon stop shy of 3% and "suffer" from their lower payout ratio which tends to be around 30% compared to their European counterparts' 50%.
Second ratio I look at is the trailing P/E (also referred to as Schiller P/E) which is a tremendous indicator for valuation and which stands at an absolute alarming 26.7 for the S&P500 as I write this. BP comes in first in this regard with Eni and Statoil following closely. While Chevron and Exxon are still very cheap with trailing P/Es of 10.1 and 10.4 they are again pricier than the most expensive European oil majors.
Three Favorites
So from a valuation perspective I'm most interested in Eni, Statoil and Total. BP does not compare too badly against them especially considering the ramifications from the Deep Water Horizon incident but then again they do show the by far lowest tax rate which might align with the average going forward. Royal Dutch Shell is certainly attractive from a balance sheet perspective but doesn't compare too well on the multiples. There is so much more to speak for or against these stocks but from a purely valuation oriented standpoint I feel most comfortable with these three.
Dependence on the oil price
In order to better understand the impact of the oil price itself on the earnings and dividend paying power let's have a look at the following table:
There are two major observations here. Firstly, there is only one data point which shows a loss (2010 Deep Water Horizon oil spill) which speaks volumes about the rock solid earnings power of the industry's leaders. Secondly there is certainly a correlation between profitability and oil prices but that's rather unpronounced in magnitude with oil prices between $40 and $110 and average net profitability between 5.7 and 9.2%. Here is the corresponding chart, oil prices are yearly averages of Brent oil:
I have no idea to what level oil prices might fall and at what prices any of these players might struggle to make decent profits but given the basic workings of finite resources I suppose that any price level that would severely impact the bottom line of Exxon and the like would be temporarily at most. The world needs incredible amounts of oil and refined products every single day and that is hardly going to change sometime soon. While there is plenty of money going for returns that provide more than just inflation compensation I think there will be a lot of demand especially for proven dividend aristocrats like Total, Statoil and Eni and to a somewhat lesser extent for BP, Royal Dutch Shell and the American oil majors.
The bottom line
Particularly Eni, Total and Statoil demonstrate rare opportunities to invest in industry leaders whose earnings proved to be resilient towards oil price volatility and who are at the same time trading at single digit P/Es. There is no reason to expect dividend cuts even with future oil prices substantially lower than the current $50. In case oil prices and valuations of the sector should revert to their long term averages we should see some pleasant appreciation in the stock quotes as well.
As with any investment ideas, do your own research and never buy anything because someone else thinks it's a great idea.
While the US runaway stock market leaves the investor with very little attrative options in the mother country of the shale oil that brought about this tremendous opportunity I'll focus this analysis on European companies that boost 5%+ dividend yields that are extremely hard to get by with comparable risks as I shall show.
First of all let's have a look at the seven major oil companies that are open to the dividend seeking investor. The following table has been compiled from several sources, mostly the companies' investor relations pages and Mornigstar:
What I'm looking for here is the dividend yield for the last ten years. I've calculated that yield with the average dividend payments for 2004 through 2013 and the current stock prices. While this is obviously no guarantee for likewise payments in the future it does give you a very good proxy for the dividend paying power of the corresponding stock.
Eni and Statoil both sport trailing dividend yields of more than 7% while the rest of the European pack comes in around 5%. Chevron and Exxon stop shy of 3% and "suffer" from their lower payout ratio which tends to be around 30% compared to their European counterparts' 50%.
Second ratio I look at is the trailing P/E (also referred to as Schiller P/E) which is a tremendous indicator for valuation and which stands at an absolute alarming 26.7 for the S&P500 as I write this. BP comes in first in this regard with Eni and Statoil following closely. While Chevron and Exxon are still very cheap with trailing P/Es of 10.1 and 10.4 they are again pricier than the most expensive European oil majors.
Three Favorites
So from a valuation perspective I'm most interested in Eni, Statoil and Total. BP does not compare too badly against them especially considering the ramifications from the Deep Water Horizon incident but then again they do show the by far lowest tax rate which might align with the average going forward. Royal Dutch Shell is certainly attractive from a balance sheet perspective but doesn't compare too well on the multiples. There is so much more to speak for or against these stocks but from a purely valuation oriented standpoint I feel most comfortable with these three.
Dependence on the oil price
In order to better understand the impact of the oil price itself on the earnings and dividend paying power let's have a look at the following table:
There are two major observations here. Firstly, there is only one data point which shows a loss (2010 Deep Water Horizon oil spill) which speaks volumes about the rock solid earnings power of the industry's leaders. Secondly there is certainly a correlation between profitability and oil prices but that's rather unpronounced in magnitude with oil prices between $40 and $110 and average net profitability between 5.7 and 9.2%. Here is the corresponding chart, oil prices are yearly averages of Brent oil:
I have no idea to what level oil prices might fall and at what prices any of these players might struggle to make decent profits but given the basic workings of finite resources I suppose that any price level that would severely impact the bottom line of Exxon and the like would be temporarily at most. The world needs incredible amounts of oil and refined products every single day and that is hardly going to change sometime soon. While there is plenty of money going for returns that provide more than just inflation compensation I think there will be a lot of demand especially for proven dividend aristocrats like Total, Statoil and Eni and to a somewhat lesser extent for BP, Royal Dutch Shell and the American oil majors.
The bottom line
Particularly Eni, Total and Statoil demonstrate rare opportunities to invest in industry leaders whose earnings proved to be resilient towards oil price volatility and who are at the same time trading at single digit P/Es. There is no reason to expect dividend cuts even with future oil prices substantially lower than the current $50. In case oil prices and valuations of the sector should revert to their long term averages we should see some pleasant appreciation in the stock quotes as well.
As with any investment ideas, do your own research and never buy anything because someone else thinks it's a great idea.
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