Using Growth And Risk To Identify Top Paying Energy Dividend Stocks

by: Bennington Investment Ideas

The energy industry is off from its spring highs, but should improve when the economy begins growing again. However, I believe that the energy industry is always worth following given its key role in the economy. Some investors look at energy stocks (electric utilities, natural gas, integrated oil, etc..) as good dividend stocks - consistent dividends with good growth prospects. However, a high yield is simply not enough to justify an investment. One can always ask the question, 'Is this a high dividend yield because it has strong earnings and good prospects or is it a high yield because the price is in decline due to fundamental questions about the company's future?' Finding a 5% dividend yield only to have the stock drop 20% in price is an ineffective investing strategy. When looking at investment opportunities, it is important to dig a little deeper to understand the company's growth prospects and risk profile. This analysis will looked at 506 energy companies, but screened out all companies with less than $1 billion in market capitalization which reduced that figure to 240. This analysis also excludes MLPs which should be evaluated separately given their tax implications and different risk profiles. However, for those interested in simply chasing yields here are the current top dividend yielding energy stocks:

Top Paying Energy Dividend Stocks
Ticker Name Market Capitalization ($ B) Price (8/24) Dividend Yield Industry
SDRL Seadrill Limited 14.1 31.04 9.3% Oil & Gas Drilling and Exploration
YPF YPF Sociedad Anonima 14.8 37.98 8.4% Integrated Oil
ERF Enerplus Corporation 5.0 27.59 7.8% Oil Production
LINE Linn Energy, LLC 6.3 36.23 7.7% Oil Production
PGH Pengrowth Energy Corporation 3.6 11.04 7.7% Oil Production
CPNO Copano Energy, L.L.C. 2.0 30.20 7.5% Natural Gas
AT Atlantic Power Corporation 1.0 14.98 7.3% Electric Utilities
PVX Provident Energy Ltd. 2.2 8.18 6.6% Integrated Oil
CPL CPFL Energia S.A. 12.1 25.11 6.3% Electric Utilities
PWE Penn West Petroleum Ltd 8.3 17.89 6.1% Oil & Gas Drilling
NGG National Grid Transco, PLC 36.4 50.33 5.9% Electric Utilities
POM Potomac Electric Power Company 4.3 19.32 5.7% Electric Utilities
TEG Integrys Energy Group 3.8 50.11 5.5% Electric Utilities
TOT TotalFinaElf, S.A. 114.0 48.16 5.5% Integrated Oil
DUK Duke Energy Corporation 24.6 18.87 5.4% Electric Utilities
AEE Ameren Corporation 7.0 29.49 5.3% Electric Utilities
Source: Data provided by premium services. It should be noted that YPF,PWE, CPL pay dividends in varying amounts which can have a substantial impact on yield. AT plays a monthly dividend that appears to be showing slight growth, but could also fluctuate. PWE's trailing twelve month dividend yield is 4.2%, the 6.1% is based upon an annualization of the most recent quarterly dividend of $0.273. The previous three dividends were $0.276, $0.09, and $0.089. Industry classes are provided by EDGAR Online’s I-Metrix Professional, XBRL-enabled application.

Balancing Dividends with Growth and Risk

Simply chasing yields fails to consider growth and risk with respect to the selection. The key growth is in dividend growth, but sales and EPS growth may also provide some indication of potential dividend growth. While the ability to convert sales into cash flow and dividends may vary, the large range of differences clearly impacts potential dividend yields going forward. One way to balance growth and risk with dividend yield is to look at the dividend formula:

Current Price = Forward Dividend / (Equity Hurdle Rate – LT Growth)

To maximize the Current Price, one wants to maximize the Forward Dividend, minimize the Required Equity Return and maximize the LT Growth or some combination thereof. Some rearranging shows that the goal is to find forward dividend yields and growth that are higher than the Equity Hurdle Rate or to maximize:

Forward dividend yield + long term growth - equity hurdle rate

The Equity Hurdle Rate can be calculated using the Capital Asset Pricing Model. The Risk Free Rate is most typically associated with the U.S. Treasury bond with the most appropriate time frame to match that of stocks. I would use the 10-year bond, which is currently yielding 2.2% and 6% for the equity risk premium. The Forward Dividend Yield which can be calculated based upon the Current Dividend Yield and some estimate of 1 year of Dividend growth.

This method does face a couple of challenges since growth estimates can seem to be unrealistic at times for forward projects and historical rates can be misleading. For example, a company that has just started paying dividends might show significant growth that would be expected to slow. I created a couple of arbitrary steps and capped dividend growth at 10% for computing the one year forward dividend yield. I also applied some subjectivity to the forward long term growth. routinely provides long term growth estimates in excess of 20%, which is simply not believable. The following table shows the top 20 stocks from this calculation as well as their components parts:

Top Energy Dividend Stocks
Ticker Name Beta Forward Dividend Yield LT Growth Equity Hurdle Rate FDY + LTG - EHR
SDRL Seadrill Limited 0.5 10.3% 10.0% 5.1% 15.2%
CPL CPFL Energia S.A. 0.8 6.6% 10.0% 6.7% 9.9%
ETR Entergy Corporation 0.6 5.8% 10.0% 6.0% 9.8%
QEP QEP Resources, Inc. 0.1 0.2% 10.0% 2.6% 7.6%
WEC Wisconsin Energy Corporation 0.4 3.5% 8.0% 4.4% 7.1%
YPF YPF Sociedad Anonima 0.8 8.9% 5.0% 7.1% 6.8%
GXP Great Plains Energy Inc 0.8 4.5% 9.0% 6.7% 6.8%
CVX Chevron Corporation 0.8 3.4% 10.0% 6.7% 6.7%
NU Northeast Utilities 0.5 3.6% 8.2% 5.3% 6.5%
EC Ecopetrol S.A. 0.9 3.5% 10.0% 7.3% 6.2%
OAS Oasis Petroleum Inc. 0.3 0.0% 10.0% 3.9% 6.1%
NVE NV Energy, Inc 0.7 3.7% 8.8% 6.4% 6.1%
OKE ONEOK, Inc. 1.1 3.7% 11.0% 8.7% 6.0%
CVA Covanta Holding Corporation 0.7 1.9% 10.0% 6.1% 5.7%
WGL WGL Holdings Inc 0.3 4.1% 5.3% 3.7% 5.6%
VVC Vectren Corporation 0.4 5.4% 5.0% 4.8% 5.6%
CVE Cenovus Energy Inc 0.3 2.5% 7.0% 3.9% 5.6%
SO Southern Company (The) 0.4 4.8% 5.0% 4.3% 5.5%
PCG Pacific Gas & Electric Co. 0.3 4.7% 5.0% 4.3% 5.5%
CNL Cleco Power LLC 0.5 3.6% 7.0% 5.2% 5.4%

Source: Data is derived from data from services (betas) and other data provided by EDGAR Online’s I-Metrix Professional, XBRL-enabled application. This table uses forward estimated dividend yields while the first table used a historical dividend yield measure, hence the differences.

The first observation is that there are a couple repeats from the initial list: YPF, CPL, SO, and SDRL, which topped both lists. The second observation is that QEP made the list with almost no dividend but due to a near 0 beta and good growth prospects. The list is also a good mix of relatively well known stocks like PCG and CVX and some smaller players, CNL and WGL that I've not seen before. The following table shows descriptive information for these 20 stocks:

Descriptive information
Ticker Name Price (8/24) Market Cap ($ billions) Industry
SDRL Seadrill Limited 31.04 14.1 Oil & Gas Drilling
CPL CPFL Energia S.A. 25.11 12.1 Electric Utilities
ETR Entergy Corporation 63.94 11.1 Electric Utilities
QEP QEP Resources, Inc. 34.87 6.1 Oil Production
WEC Wisconsin Energy Corporation 31.49 7.3 Electric Utilities
YPF YPF Sociedad Anonima 37.98 14.8 Integrated Oil
GXP Great Plains Energy Inc 18.98 2.5 Electric Utilities
CVX Chevron Corporation 97.59 195.7 Integrated Oil
NU Northeast Utilities 34.26 5.9 Electric Utilities
EC Ecopetrol S.A. 40.66 83.8 Oil Production
OAS Oasis Petroleum Inc. 24.31 2.2 Oil Production
NVE NV Energy, Inc 14.60 3.4 Electric Utilities
OKE ONEOK, Inc. 68.36 7.2 Natural Gas
CVA Covanta Holding Corporation 15.89 2.3 Electric Utilities
WGL WGL Holdings Inc 39.95 2.0 Natural Gas
VVC Vectren Corporation 26.76 2.1 Natural Gas
CVE Cenovus Energy Inc 34.46 26.3 Oil Production
SO Southern Company (The) 41.23 34.5 Electric Utilities
PCG Pacific Gas & Electric Co. 42.33 16.5 Electric Utilities
CNL Cleco Power LLC 34.85 2.1 Electric Utilities
Source: Data is derived from data from services Industry classes are provided by EDGAR Online’s I-Metrix Professional, XBRL-enabled application

This article has quite a bit of information in it and should be used as a starting point. A critical note is that long term growth is a key driver of the rankings, but is also very subjective. Stocks that appeared higher in the rankings with lower long term growth rates are probably more promising. For example, CPL was calculated with a long term growth of 10%, if that growth is really 5%, its rank would have dropped from second to 34th. This puts it in the top 20% of all stocks reviewed, but illustrates the impact of subjectivity. The second caution is that this is an analytical approach driven by data from three sources, while the data should be accurate, there is no guarantee of that. Furthermore, as an analytical approach, there is no consideration for stock valuations, fundamentals or issues of these companies' markets.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.