ConocoPhillips: A History Lesson In Seemingly Poor Performance

| About: ConocoPhillips (COP)
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Summary

ConocoPhillips stock price is near where it was in 2009.

In addition, the dividend was cut dramatically.

However, it’s important to recognize that the results haven’t been as poor as they might originally appear.

At the end of 2009, shares of ConocoPhillips (NYSE:COP) were trading hands at a price near $51. Today the mark is just under $50 - it's been over seven years and the price is more or less where it was. In addition, through 2009 Conoco paid $1.91 in dividends. This number grew for many years, but was cut to just $1.00 annually back in 2016.

With these two ideas in hand - lack of capital appreciation and a material dividend cut - you might suppose that Conoco has been a poor investment. That's a misleading takeaway.

First I'd like to start with the dividend. The dividend cut probably wasn't perceived by good news for many. There's a rational argument to be made that it was a prudent move - a lower payout means less outgoing cash and more stability in difficult times. Of course that may not be of much solace to those relying on that income stream.

Still, for the long-term holder, the dividend cut gets mitigated a bit by the solid payments that were made in the years leading up to this decision. I'll show you what I mean.

Suppose you purchased 100 shares of ConocoPhillips at the end of 2009 for $5,100. (The exact numbers aren't important; the takeaway will be in percentage points.) Your anticipated income would have been ~$191 based on a trailing basis and something a bit higher than that on an ongoing basis.

In 2010 you would have received $215 in dividend income. That's yours to spend or reallocate as you please. For our purposes, suppose you elected to reinvest. This would likely occur say quarterly, but for simplicity we'll assume reinvestment at year-end.

You could have added ~3.2 shares at the end of 2010, for a new total of 103.2. In 2011 the dividend would be increased to $2.64 - a 22.7% increase. Yet your total income would increase by 26.7%, from $215 up to $272. The reinvestment allows total income growth to outpace per share growth.

And so the beat goes on. In 2012 the dividend was held steady, but your total income would have increased by 3.6% due to reinvestment. In 2013, the per share dividend increased 2.3%, but your total income would have grown by 6.9%. It's not talked about as often, but this is the same reason why investments like AT&T (NYSE:T) can prove to be solid total income growers, despite the sluggish per share pace.

Your total income would have climbed through the years from an expectation of ~$191 to $215, $272, $282, $302, $330 and up to $355 by 2015. In those six years the per share dividend would have increased by 54% and yet your total income would be about 86% greater.

And then 2016 came along, with the dividend cut. That $355 in income would have dropped all the way down to $128. For the reasons mentioned above, this may or may not be perceived as good news. However, there was a bit of assisting factor. If you simply held 100 shares and spent the dividends, your income would have declined to $100 even. Reinvesting along the way added about a fourth back in total income.

By the end of 2016 you would have accumulated roughly 131 shares. This too is an important note. Despite the share price actually declining from 2009 to 2017, the total value of your holding would have gone from $5,100 to about $6,500. Now to be sure this isn't an impressive gain - about 3.5% per annum. Yet it should underscore the idea that a stock that has "gone nowhere" is not the same as an investment that has generated 0% returns.

And there's another very important factor in play. Remember that our starting point is 2009. In 2012 Conoco announced the spin-off of Phillips 66 (NYSE:PSX). For every 2 shares of Conoco that you held you received 1 share of the new Phillips 66. So beginning in April of 2012, you'd also have 50 shares of Phillips 66 alongside your 100 share stake in Conoco. This has a real impact.

To start in 2012 Phillips 66 paid $0.45 in dividends, generating $22.50 in dividend income on your 50 shares. The reinvestment program may not be as effective, but bit-by-bit it grows over time.

In 2013 this stake would generate $71 in income. In 2014 it would increase to $97. And here again the total income growth story is retold: the dividend per share increased by 34%, but your total income would have been 37% greater.

For 2015 you would have received $115 in annual income and last year the mark would have been closer to $133. In addition, your share count would have gone from 50 shares up closer to 56 shares.

So let's add it up. We know from above that the starting 100 shares of Conoco turned into 131 shares. The value of that stake went from $5,100 to $6,500. And the income went from $191 down to an anticipation of ~$139 with the new $0.265 quarterly dividend.

However, the Phillips 66 stake really pulled its weight. You went from owning 0 shares to owning 56 shares in a new firm. That stake would now be worth about $4,400 on its own. In addition, based on a $0.63 quarterly dividend (which could be raised this year), you'd also receive $140 or so in anticipated income. That's impressive in my view. Roughly half your Conoco income today would be coming from a spin-off that you had no idea about when you started investing just seven years ago.

Add them up and you have ~$10,900 in total value. That's an 114% total increase or an average compound gain of over 11% per annum. And your total anticipated income would be about $279 - representing a 46% gain, or an average compound increase of over 5% per year.

This is the sort of thing to keep in mind when you're thumbing (or clicking) through stock charts. All may not be as it originally appears. With Conoco you could see the stagnant stock price, know about the dividend cut and more on. Yet that's not the full picture. Despite the poor first impression, the results have actually been quite good for the longer-term shareholder.

Disclosure: I am/we are long COP, T.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.