The company’s latest dividend increase was announced in July 2013 when the Board of Directors approved a 4.50% increase in the quarterly dividend to 69 cents /share. The company’s peer group includes Exxon-Mobil (XOM), British Petroleum (BP) and Royal Dutch Shell (RDS/B).
Over the past decade this dividend growth stock has delivered an annualized total return of 13.80% to its shareholders.
The company has managed to deliver a 6.20% average increase in annual EPS over the past decade. ConocoPhillips is expected to earn $6.28 per share in 2014 and $6.17 per share in 2015. In comparison, the company earned $6.43/share in 2013.
ConocoPhillips does not have a record of consistent share repurchases. Between 2007 and 2014, the number of shares decreased from 1.646 billion to 1.24 billion.
ConocoPhillips is forecasting growth in production in the range of 3% - 5%/year through 2017. This would be driven by the company’s 16 billion annual capital expenditures plan. The goal is to reach a reserve replacement ratio of 100%. The growth areas include Australia’s LNG project, Lower 48 growth in the US, North Sea, Malaysia and Canadian Oil Sands operations. The nature of the oil business is such, that for every barrel of oil pumped out of the ground, your reserves decrease by one barrel. With advancements in technology however, it is possible to obtain more oil from existing and new wells than before. In addition, oil and gas companies spend large amounts of money on seismic activity studies, in order to increase their chances of striking oil.
Over the past four years, the company has sold off a lot of assets, raising billions of dollars in the process. Examples include selling off its stake in Lukoil, and selling off its stake in the Kashagan project in Kazakhstan. In addition, the company spun-off its downstream business Phillips 66 (PSX) in 2012 to shareholders.
The reason why ConocoPhillips appeals to me is the fact that most of its oil and gas production is derived from stable places such as US, Canada and Europe. Places in Asia Pacific, Middle East and Africa accounted for just 19% of oil and 12% of NGL and 21% for Natural Gas. Given the rise in nationalist governments that are not friendly to foreign oil companies, the location of majority of producing wells in stable countries makes it much less likely that those would be nationalized. In addition, management is focused on growth through high-margin projects, and does not focus on growth for growth sake. It is good news for me as a shareholder to have a management team which focuses on maximizing owner returns by pursuing higher margin projects, and disposing of lower margin ones..
The annual dividend payment has increased by 15.70% per year over the past decade, which is higher than the growth in EPS. This was mostly possible due to the expansion in the dividend payout ratio over the past decade. Going forward, I expect dividends to grow by 6% - 7%/year
A 6% growth in distributions translates into the dividend payment doubling every twelve years on average. This dividend amount is adjusted for the spin-off of Phillips 66 in 2012. If we check the dividend history, going as far back as 1989, we could see that ConocoPhillips has actually managed to double dividends every eight years on average.
The dividend payout ratio has increased from 12% in 2004 to under 42% by 2013. A lower payout is always a plus, since it leaves room for consistent dividend growth minimizing the impact of short-term fluctuations in earnings.
The return on equity has decreased slightly from 21% in 2004 to 18% in 2013. Rather than focus on absolute values for this indicator, I generally want to see at least a stable return on equity over time.
Currently, the stock is attractively valued, as it trades at a forward P/E of 12.40 and yields 3.50%. I would consider adding to my position on dips, and subject to availability of funds.
Full Disclosure: Long COP, XOM, BP, RDS/B
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