I kicked off the year with investments in two companies. Those are existing positions, which I am adding to. The companies include:
ConocoPhillips (COP), which explores for, develops, and produces crude oil, bitumen, natural gas, liquefied natural gas, and natural gas liquids worldwide. This dividend achiever has managed to increase dividends for 14 years in a row. It sells for 11.60 times earnings. Earnings per share for 2014 are expected at $5.62. For 2015, earnings per share are expected to go down to $3.72. This is down from an expected $6.34/share that Wall Street analysts were predicting just 90 days ago. At that 2015 rate dividend growth will likely stall. You might want to check my analysis of ConocoPhillips (COP).
I think the effects of sharp drop in oil have not been felt yet across the investment community. Many investors seem to believe that this is a short term event. In reality, I see a lot of players under pressure - from Oil producer states to unconventional exploration and production companies. The interesting thing about cyclical companies is that they appear cheapest near the top, but most expensive when things are closer to the cyclical bottom.
I see companies slashing capital spending, and a few flow-through entities cutting dividends, but I have not seen anyone go bankrupt yet. The magnitude of the oil collapse reminds me a little bit of the housing crisis, which spread through the economy and affected different sectors. This was preceded by a long boom and stories of boom towns, people who made a lot of money quickly, etc. I think the real risk is that oil fell by 50% from highs, yet stock prices on Exxon Mobil (XOM), Conoco Phillips (COP) and Chevron (CVX) are not down by as much. I think many are expecting a quick snapback up in oil prices. Therefore, many could probably be surprised negatively in the short-term (12 months from now). I am prepared for slow and gradual decreases in share prices, which would be great for an investor like me who has a set amount of fund to deploy to work every month, rather than invest a lump sum.
As I mentioned in the articles before, I am planning to slowly buying up shares in Exxon Mobil (XOM), Conoco Phillips (COP) and even Chevron (CVX). Companies like Chevron and Exxon Mobil are the ones that will survive drops to $40/barrel, and will benefit since they will be able to acquire reserves at a discount.
Conoco Phillips could benefit as well, although further sustained declines in commodity pricing below $50 could put the dividend in risk territory. I believe Conoco Phillips management is good at capital allocation, and runs the company for shareholders (as evidenced by sale of Lukoil (LUKOY) stake in 2011, and other projects while returning billions to stakeholders through share buybacks and dividends and spin-offs). I doubt they will cut the dividend, but it is likely dividend growth will be zero or very low for a few years if prices stay low for extended periods of time. I am planning to slowly buy things this year, and dollar cost average my way. ExxonMobil is probably going to be the next purchase in February and then possibly Chevron in March or April. Again, this is not a timing call. I simply have some amount to invest every month, and I like diversification, hence I buy stock over time. I don’t have $1 million sitting on my checking account, waiting to be deployed at once. But as I mentioned before, while prices are down, that doesn't mean they can’t go lower from here. Hence I am also buying companies with more durable earning streams throughout different phases of the economic cycle.
One example is Diageo plc (DEO), which manufactures and distributes premium drinks. This international dividend achiever has managed to boost distributions for 15 years in a row. It has a ten year dividend growth of 5.80%/year in its base currency the British Pound. Diageo owns a portfolio of strong brands, with wide consumer appeal, which are usually number one or two in their respective categories. A few include Smirnoff, Johnnie Walker, Guinness, Baileys, and Captain Morgan. The company also has a wide distribution network on a global scale, which might be difficult for a competitor to replicate. Diageo is the largest spirits company in the world, which provides it with the advantage of scale, relative to its competitors. The stock is attractively valued at 17.40 times forward earnings and has a current dividend yield of 2.80%. I would be even more excited if the stock drops further, since I have room in my portfolio for more of this quality company. Check my analysis of Diageo.
Full Disclosure: Long COP, CVX, XOM and DEO
- Not all P/E ratios are created equal
- Are Energy Investments Today a Once in a Lifetime Opportunity (Part 2)
- Are Energy Stock Values Today a Once in a Lifetime Opportunity?
- Strong Brands Grow Dividends
- How to Generate Energy Dividends Despite the Peak Oil Non-Sense
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