Known for large amounts of free cash flow and stability, large oil producers tend to be core holdings in dividend-growth portfolios. These companies tend to have billions of dollars in cash on hand, little debt, and fairly predictable business models. With the exception of BP, which had to cut its dividend to cover the unexpected expenses related to the Gulf Oil spill, our coverage universe of major oil companies consists of companies yielding in excess of 2.5%.
That being said, we think Chevron (CVX) and ConocoPhillips (COP) are the most attractive names in the space, but we also really like Royal Dutch Shell (RDS.A). However, we aren't big fans of Exxon Mobil (XOM). We dig into our thoughts on these four dividend-growth stalwarts.
Chevron is one of our favorite names in the space. The company trades at a discount to our fair value of $132, has a robust operating margin just shy of 20%, and currently yields 3.4%. The firm's dividend has grown at a compounded rate of nearly 8% over the last three years, and we think the growth will continue. Chevron's Valuentum Dividend Cushion is also 3.1, suggesting the company won't have any issues paying it out in going forward.
ConocoPhillips' future business prospects became a bit more certain after its recent spin-off of Phillips 66 (PSX). The new Conoco focuses more on upstream operations and exploration, which tend to be more stable and predictable businesses. At just 6x 2012 earnings and with a dividend yield of 4.7%, we hold the firm as one of our core holdings in our Dividend Growth Newsletter portfolio.
Royal Dutch Shell
The Netherlands-based oil-giant has seen its shares fall 9% over the course of the year, but we like its cash-rich business. Based on our discounted cash flow valuation, we think shares are worth $86, though the market currently prices the firm at around $66. In addition to significant valuation upside, we like the firm's 5% dividend yield and company the firm has a chance to grow it in the future. With a Valuentum Dividend Cushion score of 1.6, we think Royal Dutch Shell's dividend is safe, but not as safe as Chevron's or ConocoPhillips' dividend.
Exxon Mobil is one of the largest companies in the world, sporting a market capitalization of $390 billion. The company currently trades at 10x our 2012 earnings forecast, which is a slight premium to its peers, and at $83, we think shares are fairly valued. We think the firm's dividend is incredibly safe, but we don't really like the company's total return profile. Not only do we not see much upside valuation at current levels, but we don't find the firm's 2.7% dividend yield very enticing. Although we think the firm has room to grow its dividend, we still think Chevron, Conoco, and Shell provide investors with better yield and total return profiles.
In the spirit of transparency and to show the relevance of the Dividend Cushion to any dividend-growth investor's processs, we reveal the effectiveness of the Valuentum Dividend Cushion as a predictor of dividend cuts in the following table:
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Some of the firms mentioned in this article may be included in our actively-managed portfolios.