Monday, June 7, 2010

Three Dividend Stocks to Capitalize on BP’s weakness

The woes of BP’s oil spill are making national headlines these days. After several unsuccessful attempts at capping the oil spill, British Petroleum (BP) is still unable to stop the oil from flowing in the water. With liabilities expected to reach several billion dollars, investors have been selling off BP’s stock, which has caused it to decline over 30% from its highs in April. Many investors are now wondering whether now is the time to capitalize on the weakness in BP’s stock price and purchase the stock at a discount.

On the positive side, the company earned $16.5 billion in 2009, or $5.28/share. It earned $1.92/share in the first quarter of 2010, which was more than enough to cover its quarterly dividend of $0.84/share. With a dividend yield of 9% and a Price/Earnings ratio of 6, the company definitely looks attractive. The main issue here is the total liabilities that the company would have to incur in order to clean up the mess from the oil spill. If hurricane season is especially intense this year, the environment of the whole Gulf of Mexico region could be severely affected. This could make it very expensive to clean up the oil spill mess. With all the uncertainty around, analysts are forecasting either the implosion of the company or a takeover of BP. Given the company’s strong cash flow generation however, BP should be able to shoulder the costs financially. The main problem is the damage to its reputation.

At the same time other quality oil companies have gone down in tandem with BP, falling oil prices and falling equity indices worldwide. If investors are not willing to take the company specific risk of BP, they could look elsewhere to purchase quality oil companies at a discount. Three dividend growth oil stocks which look attractively priced at the moment include Chevron (CVX), Exxon Mobil (XOM) and Royal Dutch Shell (RDS-B).

Exxon Mobil Corporation (XOM) is a manufacturer and marketer of commodity petrochemicals, including olefins, aromatics, polyethylene and polypropylene plastics and a range of specialty products. It also has interests in electric power generation facilities. This dividend aristocrat has raised dividends for 28 consecutive years. The stock yields 2.90% and trades at a P/E of 14. (analysis)

Chevron Corporation (CVX) manages its investments in subsidiaries and affiliates, and provides administrative, financial, management and technology support to United States and international subsidiaries that engage in fully integrated petroleum operations, chemicals operations, mining operations, power generation and energy services. This dividend achiever has managed to boost distributions for 23 consecutive years. The stock trades at a P/E of 11 and yields 3.90%.(analysis)

Royal Dutch Shell (RDS.B) is engaged worldwide in the aspects of the oil and gas industry and also has interests in chemicals and other energy-related businesses. The Company operates in three segments: Upstream, Downstream and Corporate. This dividend stock has raised distributions since 1993. The stock yields 6.40% and trades at a P/E of 11. (analysis)

For enterprising investors looking for a bargain, BP stock might look like the ultimate value play. That being said, investors should do well over time with a lower amount of risk by allocating their capital to other oil companies. My personal favorite is Chevron (CVX), with its adequately covered dividend payment, above average yield and low price/earnings ratio of 11. I also like the dividend growth prospects of Chevron as well, which makes it my top oil pick.

Full Disclosure: Long BP, CVX, RDS.B and XOM

Relevant Articles:

- Chevron Corporation (CVX) Dividend Stock Analysis
- Exxon Mobil (XOM) Dividend Stock Analysis
- Chevron (CVX) Raises Dividends; MLPs follow suit
- Royal Dutch Shell Stock Analysis

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