Company Description: ConocoPhillips Co. was formed via the 2002 merger of Phillips Petroleum and Conoco. It is the fourth largest integrated oil company in the world.
Fair Value: In calculating fair value, I consider the NPV MMA Differential Fair Value along with these four calculations of fair value, see page 2 of the linked PDF for a detailed description:
1. Avg. High Yield Price
2. 20-Year DCF Price
3. Avg. P/E Price
4. Graham Number
COP is trading at a premium to all four valuations above. The stock is trading at a slight discount to its calculated fair value of $65.62. COP earned a Star in this section since it is trading at a fair value.
Dividend Analytical Data: In this section there are three possible Stars and three key metrics, see page 2 of the linked PDF for a detailed description:
1. Free Cash Flow Payout
2. Debt To Total Capital
3. Key Metrics
4. Dividend Growth Rate
5. Years of Div. Growth
6. Rolling 4-yr Div. > 15%
COP earned three Stars in this section for 1.), 2.) and 3.) above. A Star was earned since the Free Cash Flow payout ratio was less than 60% and there were no negative Free Cash Flows over the last 10 years. The stock earned a Star as a result of its most recent Debt to Total Capital being less than 45%. COP earned a Star for having an acceptable score in at least two of the four Key Metrics measured.
Rolling 4-yr Div. > 15% means that dividends grew on average in excess of 15% for each consecutive 4 year period over the last 10 years (2001-2004, 2002-2005, 2003-2006, etc.) I consider this a key metric since dividends will double every 5 years if they grow by 15%. The company has paid a cash dividend to shareholders every year since 1934 and has increased its dividend payments for 11 consecutive years.
Dividend Income vs. MMA: Why would you assume the equity risk and invest in a dividend stock if you could earn a better return in a much less risky money market account (MMA) or Treasury bond? This section compares the earning ability of this stock with a high yield MMA. Two items are considered in this section, see page 2 of the linked PDF for a detailed description:
1. NPV MMA Diff.
2. Years to > MMA
COP earned a Star in this section for its NPV MMA Diff. of the $19,470. This amount is in excess of the $2,400 target I look for in a stock that has increased dividends as long as COP has. The stock's current yield of 4.11% exceeds the 3.6% estimated 20-year average MMA rate.
Memberships and Peers: COP is a member of the S&P 500 a member of the Broad Dividend Achievers™ Index. The company's peer group includes: BP plc (NYSE:BP) with a 4.5% yield, Chevron Corp. (NYSE:CVX) with a 3.3% yield and Exxon Mobil Corporation (NYSE:XOM) with a 2.6% yield.
Conclusion: COP earned one Star in the Fair Value section, earned three Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of five Stars. This quantitatively ranks COP as a 5 Star-Very Strong stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $134.00 before COP's NPV MMA Differential decreased to the $2,400 minimum that I look for in a stock with 11 years of consecutive dividend increases. At that price the stock would yield 2.0%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,400 NPV MMA Differential, the calculated rate is 8.3%. This dividend growth rate is significantly lower than the 15.0% used in this analysis, thus providing a margin of safety. COP has a risk rating of 1.50 which classifies it as a Low risk stock.
COP made significant acquisitions over the past few years to increase its reserves and production capacity. In July 2011 the company announced its intent to spin off its downstream business into a standalone Refining & Marketing pure play.
At the time, Jim Mulva, ConocoPhillips Chairman and CEO stated,
..there will be no change in the dividend for ConocoPhillips. We're not reducing the dividend in ConocoPhillips. And as it goes forward, the dividend will, with time, subject to Board certainly approval, of raising the dividend. If you look at the downstream company, it is going to have a dividend that is competitive and comparable to others and the pure plays in the downstream part of the business. So the shareholder gets the current dividend from ConocoPhillips, plus when done, is going to get cash in a form of a new dividend from the downstream company.
The stock was recently added to the Dividend Achievers list after raising its dividend for 10 consecutive years. With COP's recent share price decline, it is now trading below my calculated fair value of $65.62. I will continue look for opportunities to add to my position, as my allocation allows.
Disclaimer: Material presented here is for informational purposes only. The above quantitative stock analysis, including the Star rating, is mechanically calculated and is based on historical information. The analysis assumes the stock will perform in the future as it has in the past. This is generally never true. Before buying or selling any stock you should do your own research and reach your own conclusion. See my Disclaimer for more information.
Full Disclosure: At the time of this writing, I was long in COP (4.3% of my Dividend Growth Portfolio), and CVX. See a list of all my dividend growth holdings here.