Company Description: ConocoPhillips Co. is one of the largest independent oil and gas exploration and production (E&P) companies in the world, COP spun off its downstream assets in May 2012.
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 discount to 1.) and 4.) above. The stock is trading at a 22.2% discount to its calculated fair value of $74.92. 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 two Stars in this section for 1.) and 2.) 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%. The company has paid a cash dividend to shareholders every year since 1934 and has increased its dividend payments for 12 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 $4,825. This amount is in excess of the $2,300 target I look for in a stock that has increased dividends as long as COP has. The stock's current yield of 4.53% exceeds the 2.54% estimated 20-year average MMA rate.
Memberships and Peers: COP is a member of the S&P 500 and a member of the Broad Dividend Achievers™ Index. The company's peer group includes: BP plc (NYSE:BP) with a 4.9% 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 two Stars in the Dividend Analytical Data section and earned one Star in the Dividend Income vs. MMA section for a total of four Stars. This quantitatively ranks COP as a 4-Star Strong stock.
Using my D4L-PreScreen.xls model, I determined the share price would need to increase to $79.70 before COP's NPV MMA Differential decreased to the $2,300 minimum that I look for in a stock with 12 years of consecutive dividend increases. At that price, the stock would yield 4.5%.
Resetting the D4L-PreScreen.xls model and solving for the dividend growth rate needed to generate the target $2,300 NPV MMA Differential, the calculated rate is 6.1%. This dividend growth rate is lower than the 9.1% used in this analysis, thus providing a margin of safety. COP has a risk rating of 2.00 which classifies it as a Medium risk stock.
In May 2012, COP completed the spin-off of its downstream assets into a separate company, Phillips 66 (NYSE:PSX). I have restated COP's dividend history to eliminate the portion of dividend that is now associated with PSX. As such, 2012 will show a dividend increase for COP although the amount is the same that was paid by the combined company in 2011.
COP has made significant acquisitions over the past few years to increase its reserves and production capacity. Going forward, the company plans to spend $15 billion of capital per year to support a reserve replacement target of over 100%. COP is now trading well below my calculated fair value of $74.92. I will continue 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). See a list of all my dividend growth holdings here.