3 Dividend Champions Among Oil Majors

Includes: COP, TOT, XOM
by: Bret Jensen
It should be an interesting week in the market. Last week saw a 5%-plus rally, and we have a short week of trading starting Tuesday because of the holiday. Will the market hold the gains of next week or will we give back a substantial portion of the previous week’s rally? I think it will probably be the latter.
One of the areas that I will be looking to put some money to work if we do get that pullback is in the energy sector. Specifically I am looking at major integrated oil majors with low valuations, growing earnings and most importantly decent dividend yields with a history of significantly growing their dividend payments over time. Here are three that I will be considering.
Total S.A. (NYSE:TOT), together with its subsidiaries, operates as an integrated oil and gas company worldwide. The company operates through three segments: Upstream, Downstream, and Chemicals. The Upstream segment engages in the exploration, development, and production of oil and natural gas. It also involves in the transportation, trade, and marketing of natural gas and liquefied natural gas (LNG), as well as in LNG re-gasification and natural gas storage operations. In addition, this segment engages in the shipping and trade of liquefied petroleum gas (LPG); power generation from gas-fired power plants, nuclear, or renewable energies; production, trade, and marketing of coal, as well as in solar power systems and technology operations. As of December 31, 2010, it had combined proved reserves of 10,695 Mboe of oil and gas. The Downstream segment involves in refining, marketing, trading, and shipping
Total sells at just over seven times this year’s projected earnings. The stock now is in the bottom third of its five-year valuation range based on P/B, P/S, and P/CF. It has a generous dividend yield of 4.6%. More importantly, TOT has raised its dividend an average of 12.5% annually over the last five years. Given that Total sells for less than six times operating cash flow, a price to sales ratio of 0.6, and its earnings estimates for both 2011 and 2012 have been raised significantly over the last 90 days. I look for the growth in dividends to continue at a smart clip for the foreseeable future as long as the price of oil stays strong.
Exxon Mobil (NYSE:XOM) engages in the exploration and production of crude oil and natural gas, and manufacture of petroleum products, as well as transportation and sale of crude oil, natural gas, and petroleum products. The company manufactures and markets commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics, and other specialty products. As of December 31, 2010, it operated 35,691 gross and 30,494 net operated wells.
Exxon is widely acknowledged as one of the best, if not the best, managed oil majors in the world. XOM sells for less than 8.5 times this year’s projected EPS and eight times 2012’s consensus EPS. Exxon is selling at the bottom half of its five-year valuation based on P/E, P/B and P/CF. Although XOM only yields 2.3%, it has increased its dividend by over 8% annually over the last five years. More importantly, it has one of lowest payout ratios of the major integrated oil firms and thus has the most flexibility to raise the payout ratio in the future. Exxon is priced at a little more than one times trailing revenues and eight times operating cash flow and its earnings estimates have increased significantly over the last 90 days for both 2011 and 2012 consensus EPS.
Conoco Phillips (NYSE:COP) operates as an integrated energy company worldwide. The company's Exploration and Production (E&P) segment explores for, produces, transports, and markets crude oil, bitumen, natural gas, liquefied natural gas, and natural gas liquids. Its Midstream segment gathers, processes, and markets natural gas; and fractionates and markets natural gas liquids in the United States and Trinidad. The company's Refining and Marketing (R&M) segment purchases, refines, markets, and transports crude oil and petroleum products, such as gasolines, distillates, and aviation fuels.
ConocoPhillips yields a robust 3.5% and has raised its dividend at an average of 11.5% a year over the last half decade. COP sells at just over nine times this year’s consensus estimated EPS of $8.19. Its debt reduction efforts combined with share repurchases should provide a powerful push to increase earnings. It is also is increasing its rig count in its Bakken and Eagle Ford properties, which should accelerate revenues in the medium and long term. COP is priced at 0.57 sales and less than nine times operating cash flow, it has plenty of financial muscle to continue to increase its growth in dividend payments. COP is selling at just under $76 a share. Credit Suisse and S&P have a price target of $93 a share on COP and Deutsche Bank is at $90.
Disclosure: I am long COP.