Looking To Oil For A 2012 Dividend Play

Includes: COP, RDS.B, XOM
by: Intelligent Speculator

In the past, we have looked at many different sectors for dividend stocks and one of the more promising ones has been companies in the oil & gas sector. In fact, one of the few criticisms that I received for the Ultimate Sustainable Dividend Portfolio has been being perhaps a bit overweight in oil/energy stocks. That is certainly something that I will be looking at as is the idea of having more international exposure in that portfolio. For that purpose, today I will be looking at two of the stocks that did make the cut, Exxon Mobil Corp (NYSE:XOM) and Conoco Phillips (NYSE:COP) in order to see if Royal Dutch Shell (NYSE:RDS.B) might be a better pick than those two. To be fair, you could argue that all 3 companies have a fairly significant international component but I do think that RDS/B might be a good addition here. To judge them, I will use sustainable factors but also the top 20 things that I look at when judging dividend stocks.

Dividend Metrics

Ticker Name Current Dividend Yield 5 year Dividend Growth 1 year Dividend Growth
RDS.B Royal Dutch Shell PLC 4.47 6.54 0
XOM Exxon Mobil Corp 2.23 7.64 6.32
COP ConocoPhillips 3.67 12.89 22.79

Exxon Mobil Corp

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Conoco Phillips

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Royal Dutch Shell

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I think that you could maybe argue that Conocco Phillips might have a better profile give the growth in recent years but since Royal Dutch Shell pays almost 1% more already, I would still likely side with RDS/B, with the only worrying point being that dividends have not increased in nearly 2 years. That is certainly cause for concern.

Company Metrics

Ticker Name Sales Growth (1 year) Sales Growth (5 year) Earnings growth P/E ratio Margins growth Payout ratio Return on Equity Debt to Capital Ratio
RDS/B Royal Dutch Shell PLC 32.3 13.34 17.43 7.46 -1.43 50.66 14.15 N/A
XOM Exxon Mobil Corp 23.96 9.01 18.58 10.14 -3.2 28.82 23.67 0.04
COP ConocoPhillips 29.21 12.55 16.08 8.91 -7.4 27.95 17.4 0.24

In terms of sales, Royal Dutch Shell has been growing its numbers very quickly while earnings growth is strong but comparable to its two US based competitors. The bigger worry though is that the payout ratio for RDS/B is much higher (almost double COP and XOM) which will certainly leave less place for improvement.

As well, Royal Dutch seems to have a bit higher debt than XOM for example.

Stock Metrics

Ticker Name Price Trading Volume
RDS/B Royal Dutch Shell PLC 75.2 916877.5
XOM Exxon Mobil Corp 84.18 19863056
COP ConocoPhillips 71.82 8191055.5

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Industry Metrics

I don’t think there is any doubt that the outlook for oil prices is very uncertain. It is very much tied to the world economy and there are still many questions about China, Europe and even the U.S. economy. How oil will react looks more like a guess in the short term. I do however think that the longer term outlook remains very strong. The demand continues to climb much more quickly than producers can improve capacity (when even possible). These companies are profitable, have little to no debt and while there is competition, the big players are the same year after year and I don’t think anyone expects one of them to outperform the others significantly.

Fit Within Your Portfolio and Sustainability

I would probably argue that the Ultimate Sustainable Dividend Portfolio was perhaps a bit too weighted into oil stocks and will probably adjust that over time. That and the lack of international exposure are probably the two biggest flaws as of right now. That being said, I still think the portfolio is exceptional and will perform very well over time. It’s also very important in my opinion to include some oil/energy stocks in your dividend portfolio. These companies generally have very stable revenues, and are able to pay consistent and solid dividends. It’s also important to note how sustainable and long term these companies are. Oil might eventually go away but probably not in our lifetimes and in fact, it is likely to become much more valuable before that happens so I personally do not worry very much about the prospects for these companies. If I had to pick, I think I might still pick the two same ones although you could easily argue that Royal Dutch Shell would make a great pick, especially if it resumes dividend increases.