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ConocoPhillips (COP) is a leading dividend stock that has had a somewhat disappointing 2012, with the stock delivering about a 7% return while the broader market has climbed about twice as much. In May 2012, COP spun-off its marketing and refining division, Phillips 66 (PSX). COP shareholders received 1 share of PSX for every two shares of COP that they owned. In June of 2012, Goldman Sachs (GS) downgraded the company. COP is an independent upstream oil and gas exploration company with global operations. COP is headquartered in Houston, Texas.

COP had about $244.8 billion in revenue in 2011; however, this number will be substantially smaller in 2012 due to the PSX spin-off. Analysts are targeting $95.5 billion. COP has a market capitalization of $69.7 billion and an enterprise value of $95.4 billion, suggesting significant leverage. PSX is substantially smaller with a $29.2 billion on estimated 2012 revenue of $176 billion. The refining business is notorious for low margins and low returns on equity, hence the very low price to sales ratio.

While COP has a strong track record of paying dividends, there has been limited growth. For 2011, its payout ratio to net income was 29% and its payout to operating cash flow was smaller at 18%. COP's estimated forward dividend yield is 4.6% based upon a closing price of $57.41 and the author's projected annual dividend of $2.64. The following table shows the estimated forward quarterly dividends as well as the recent historical quarterly dividends.

Historical and Projected Quarterly Dividends
TypeEx-Dividend DateQuarterly Dividend ($ per share)Change on prior year
Projected7/19/20130.6600.0%
Projected5/17/20130.6600.0%
Projected2/16/20130.6600.0%
Projected10/12/20120.6600.0%
Historical7/19/20120.6600.0%
Historical5/17/20120.6600.0%
Historical2/16/20120.6600.0%
Historical10/13/20110.66020.0%
Historical7/21/20110.66020.0%
Historical5/19/20110.66020.0%
Historical2/17/20110.66032.0%
Historical10/27/20100.55010.0%
Historical7/29/20100.55017.0%
Historical5/20/20100.55017.0%

Source: Author estimates, Yahoo!Finance *Excludes one time dividend of $17.025 per share in May 2012 for the spin off of its refining and marketing division.

While COP has not raised its dividend recently, it has some room based on cash flow and net income to do so. With analysts projecting an average EPS of $5.60 per share for 2012 and $5.67, COP has cushion to continue to pay the $2.64 annual dividend. However, this would require a much higher ratio than in 2011 when EPS was $8.76. So while, COP has repeatedly reiterated its commitment to providing a strong dividend, it would be more promising if the underlying financials were strong enough to raise it with the same payout ratio as in the past. However, perhaps more alarming is when one considers the range of EPS targets. Even for 2012 with just one quarter left, the analyst range was $4.92 to $6.35. However, that span is small compared to the 2013 range of $2.35 to $9.05. The low end would require a greater than 100% payout ratio to avoid a dividend cut.

For investors, it remains to be seen how COP will perform. Uncertainties in production activities could impair the companies financial performance. While I find it unlikely that it would be sufficient to require a greater than 100% payout ratio, COP still has sufficient cash and retained earnings to make the same dividend payment, assuming management expects improvements by 2014.

Source: ConocoPhillips: Hoping For Growth, Fearing A Cut

Additional disclosure: Disclaimer: This article is for informational and educational purposes only and shall not be construed to constitute investment advice. Nothing contained herein shall constitute a solicitation, recommendation or endorsement to buy or sell any security.