Husky Energy: High Yielding Oil Play

When a company's prospects for earnings success are tied to the price of a commodity, some funny things tend to happen to its share price. Throw in a rising dividend and a higher yield and things get even more interesting.

A case in point right now, is oil stocks. Most oil stocks in Canada are fairly low yielding but Husky Energy (HUSKY.PK) stands out in offering a higher dividend yield to investors. Recently as oil climbed from under C$100 to around C$147, oil stocks soared with sentiment all around claiming high oil was here to stay and that we could hit C$200/barrel quickly. Since then oil has begun to come off as it is now flirting with C$125/barrel. Evidence exists that high oil is curbing demand, and that the U.S. economy is slowing. These factors along with the usual speculative trading dynamics seem to have turned the bus around.

Anticipating this move, the stocks of the oil companies themselves have been falling. So much so, that Husky Energy has actually come off about 23% since May 21. The iShares Cdn S&P/TSX Capped Energy ETF [XEG.T0] has come off about 18% during the same time frame. What makes the move down by Husky so intriguing to me is that the stock pays a nice, rising dividend. Husky is now yielding almost 4% and sports a dividend pay out ratio of earnings of about 35%. If you expect the world's insatiable appetite for oil to continue, and expect per barrel prices to leave double digits as a distant memory, take note. Remember, oil is still well above its average price over the last few years.

For every $1,000 invested, Husky is paying you C$40/year currently and this will likely rise as their fortunes rise with oil and oil demand. As the sentiment mounts and oil trades lower, it is no fun to have the value of your oil stock fall. However, a nice yield certainly cushions that fall. It allows you to pick up more yields or at least be paid while you wait for your holding to appreciate with the global demand for energy.

In my opinion, this is a very low risk yield with minimal downside and major upside potential. If your investment strategy focuses on dividends and dividend growth, as mine does, then a 4% yield on a non-financial stock that adds diversity to a portfolio is interesting to say the least.

 

Disclosure: None

Comments

[NOWHEREMAN:]

4% doesn't cover inflation. Buying a Pink Sheet company that doesn't provide adequate protection against inflation isn't in the best interests of serious investors.

If you want to present it as speculation, that's a different story.

2008 Jul 23 10:50 AM

[rhj123:]

Paultaut is surely correct! Why do "experts" keep recommending stocks for dividend return of percentages below inflation? 4% is losing more than that much by double! There are plenty of good stocks returning dividends around 10%. See DHT, ATb. Even PFE beats 4%, and PBT is above 10% and has an excellent history.

2008 Jul 23 11:58 AM

[jjason:]

A yield of 4% is a low yield. Please stop pushing this stock.

PWE would be a much better yield at $29.00.

2008 Jul 23 01:02 PM

[moneygardener:]

While I am certainly not an 'expert'. A rising dividend with a starting point absolutely beats inflation unless the rate is out of control. Canada's inflation rate is expected to peak at around 4.3%, but is usually kept below 3%. Husky is not a pink sheet stock for me, as I live in Canada. In Canada we have few energy stocks that yield at this level of dividends which are very tax favourable.

2008 Jul 23 01:59 PM

[glenncz:]

you have got to be kidding, 4% is Not a high yield and it only provides a "cushion" of a fall of about $2.50 in this stock, which probably lasted until about 11:30am today! (since 9:30a)

2008 Jul 23 08:19 PM

[DrT:]

The level of commentary has surely sunk to a new low. Just because a multibillion dollar company does not want to pay ridiculous US listing fees and do the Sarbanes-Oxley thing means morons can write it off as "pink sheets". After going through their quarterly results I hope these guys shorted the stock!

2008 Jul 24 01:51 AM

[moneygardener:]

Husky just raised their dividend by 25% and announced an earnings increase of 89%, the stock is now yielding about 4.9%.

I am a little confused as to where this conversation has gone. A yield of 4% for any stock is pretty solid if the underlying growth is still there. Yes dividends cushion falls, another reason why dividend investing is a great strategy for long term capital appreciation.

2008 Jul 24 11:03 PM

[buyforeclos...:]

Sorry but MUCH better dividend stocks out there... this is a LOSER unless Oil goes higher and that may not happen in the next month or 2... May be able to buy this for $8-$10 less

2008 Jul 29 11:54 PM