by Charles Sizemore | March 12, 2013 6:45 am
Last month, I ran a special “shareholder friendliness” screen in which I bumped the most recent Dividend Achievers list against the most recent Buyback Achievers list. I created a super-portfolio of companies that were both raising their dividends and buying back their shares in large quantities.
I stopped short of making a specific investment recommendation last month, instead offering the entire model portfolio as an investment “fishing pond” for your consideration. But this month, I am going to make a recommendation from the list: oil major ConocoPhillips (NYSE:COP).
During the past 10 years, ConocoPhillips has raised its quarterly dividend by nearly a factor of four, from 18 cents per share to 66 cents per share. It also spun off its refining and pipeline assets as a separate company.
Big Oil is cheap these days, as the sector has yet to fully recover from the 2008 meltdown and recession. But ConocoPhillips is cheap, even by Big Oil standards. It trades for just 8 times earnings and yields 4.5% in dividends. And with a payout ratio of just 39%, there is plenty of room to raise that dividend in the year ahead.
The fields that are being exhausted are being replaced with nontraditional and harder-to-exploit new discoveries, such as deep offshore or shale deposits. This means that, all else being equal, ConocoPhillips will be spending more per barrel to get its oil and gas to market, which should erode profitability. But I’m not particularly worried about this. It is an industry-wide issue, and there is a lot of negativity already factored into the price.
ConocoPhillips is not the sort of investment that will double your money in a year, or at least I wouldn’t expect it to. But I do expect it to outperform the market while paying out more than double the S&P 500’s dividend yield.
I like ConocoPhillips as a portfolio addition for a number of core reasons:
Action to take: Buy shares of ConocoPhillips at market and plan to hold for the next 12 months.
My second recommendation is Norwegian oil major Statoil ASA (NYSE:STO).
I like Statoil for the same reasons I like ConocoPhillips. Statoil is an International Dividend Achiever, meaning that it has kept its dividend growing throughout the crisis; it currently yields a generous 3.7%. It’s also cheap, trading for an almost pitiful 6 times already-depressed earnings.
Like ConocoPhillips and the rest of Big Oil, Statoil is being largely neglected by investors these days. Low natural gas prices and tepid demand from Europe has sapped any interest in a sector that was the darling of the pre-crisis market.
Though energy markets are global, Statoil has higher exposure to Europe than most. The continent’s deep recession has clobbered energy demand, and investors have in turn clobbered Statoil’s stock price. Take a look at the information below:
Over the past year, the Energy SPDR (NYSE:XLE) has managed to eke out a 5% return. ConocoPhillips has been flat. And Statoil is actually down by nearly 15%.
So, what’s the selling point here? Yes, it’s a cheap stock, but there are a lot of cheap stocks out there. What makes Statoil better than the rest, and what is the impetus that will unlock its value?
There are two developments that I am watching, and both involve the Byzantine world of European politics.
Europe is being tugged several directions at once. It is committed to lowering its greenhouse gas emissions under the Kyoto Protocol, but Europe is nowhere close to reaching its goals here. (Ironically, the U.S — which never signed the Kyoto treaty — is a lot closer than Europe to meeting its mandate of reducing emissions to 1990s levels due to increased use of domestic natural gas … but we’ll get to that shortly.)
Europe has made some inroads with wind farms and hydroelectric dams, but not nearly enough to make a difference. And Europe’s cleanest viable energy source — nuclear power — is now politically untouchable after the Fukushima disaster in Japan.
That leaves natural gas. Increased use of natural gas is what enabled the United States to lower its carbon footprint, and Statoil happens to be the second-largest gas provider in Europe after Russia’s Gazprom (PINK:OGZPY). But thus far, Europe’s leaders have been reluctant to push natural gas use too aggressively.
Why? Well, there are two reasons. The first is simply that the Eurozone has had a lot on its plate lately, and energy-market reform has not been high on the list of priorities. Making sure that the Eurozone doesn’t implode took precedence over energy policy. First things first.
The second reason is Europe’s dependency on Russia as a supplier. Russia views natural gas as a geopolitical weapon as much as a profitable export, and President Putin has not been reluctant to turn off the tap when it pleases him. So, Europe has been reluctant to make itself any more at Russia’s mercy than it already is.
Both of these trends play into Statoil’s favor. European gas usage will increase in the years ahead. It’s the only viable alternative. But Europe also will get an increasing percentage of its gas from non-Russian sources, of which the Norwegian Statoil is the single largest competitor.
When will this shift happen? As the debt markets stabilize, I expect Europe to tackle energy policy in the next year. But if I’m wrong (or just early), that’s ok. In Statoil, we have a cheap stock paying a good dividend stream that we can collect indefinitely.
Action to take: Buy shares of Statoil at market. This is a theme that might take some time to play out, so plan to hold for 12 months or longer.
Charles Lewis Sizemore, CFA, is the chief investment officer of the investment firm Sizemore Capital Management. As of this writing, he did not hold a position in any of the aforementioned securities. Click here to receive his FREE 8-part investing series that will not only show you which sectors will soar but also which stocks will deliver the highest returns. The series starts November 5 and includes a FREE copy of his 2014 Macro Trend Profit Report.
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