Husky Energy: High Yielding Oil Play

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Includes: HUSKF, OIL, USO
by: The Moneygardener

When a company's prospects for earnings success are tied to the price of a commodity, some funny things tend to happen to its share price. Throw in a rising dividend and a higher yield and things get even more interesting.

A case in point right now, is oil stocks. Most oil stocks in Canada are fairly low yielding but Husky Energy (HUSKY.PK) stands out in offering a higher dividend yield to investors. Recently as oil climbed from under C$100 to around C$147, oil stocks soared with sentiment all around claiming high oil was here to stay and that we could hit C$200/barrel quickly. Since then oil has begun to come off as it is now flirting with C$125/barrel. Evidence exists that high oil is curbing demand, and that the U.S. economy is slowing. These factors along with the usual speculative trading dynamics seem to have turned the bus around.

Anticipating this move, the stocks of the oil companies themselves have been falling. So much so, that Husky Energy has actually come off about 23% since May 21. The iShares Cdn S&P/TSX Capped Energy ETF [XEG.T0] has come off about 18% during the same time frame. What makes the move down by Husky so intriguing to me is that the stock pays a nice, rising dividend. Husky is now yielding almost 4% and sports a dividend pay out ratio of earnings of about 35%. If you expect the world's insatiable appetite for oil to continue, and expect per barrel prices to leave double digits as a distant memory, take note. Remember, oil is still well above its average price over the last few years.

For every $1,000 invested, Husky is paying you C$40/year currently and this will likely rise as their fortunes rise with oil and oil demand. As the sentiment mounts and oil trades lower, it is no fun to have the value of your oil stock fall. However, a nice yield certainly cushions that fall. It allows you to pick up more yields or at least be paid while you wait for your holding to appreciate with the global demand for energy.

In my opinion, this is a very low risk yield with minimal downside and major upside potential. If your investment strategy focuses on dividends and dividend growth, as mine does, then a 4% yield on a non-financial stock that adds diversity to a portfolio is interesting to say the least.

 

Disclosure: None