The classic dividend sectors are utilities and telecoms, but there is another sector populating the highest dividend-growing company lists lately, and that is energy. Energy stocks offer high dividends because domestic energy production has been surging, allowing companies with pipeline networks to get the benefit of the rising volumes via transport taxes. Also, high oil price have allowed producing companies to hike their dividends as the price of crude oil has exploded upwards over the last decade.
Yes, oil had a nasty spike and crash in 2008, but over the past 10 years the weighted-average oil price has been a lot higher than the previous 10 years, leaving extra money for dividends and oil field development.
There has been another energy-related windfall in the past three years: The price of crude oil in Europe (Brent) has tended to trade at a substantial premium to West Texas Intermediate (WTI). I have heard it said many times that this Brent/WTI gap is “about to close at any moment,” but it is still there (see chart).
The Income Outlook for Leading Energy Companies
I previously mentioned Diamond Offshore (DO), where long-term contracts for deep water drilling allow for better planning and higher dividends. In fact, total regular & special dividends per share since January 2006 have been $35.88. As the stock price has slid from about $140 in 2008 to the present $56, one could say that the shares are a “value,” particularly for yield-seeking investors. I would not use this decline as a market timing indicator, although DO’s share price is famous for “treading water”—pun intended—for years before moving aggressively as the company rolls over long-term contracts at much higher rates.
One of the greatest dividend stories in energy has been ConocoPhillips (COP). The ten-tear annualized dividend growth has been 13.8% (as of 3Q). The 10-year EPS growth is 24.8% and the 10-year return of the share price is 16%. All this comes with a dividend yield of 3.9%—not too shabby. Conoco has made some drastic changes of late to re-energize the share price. It spun off its refining subsidiary as Phillips 66 (PSX). This is similar to what Marathon Oil (MRO) and Marathon Petroleum (MPC) did earlier.
Spinning off refiners makes the overall oil business less volatile, as pure refiners can make money one quarter and lose money the next quarter, due to the volatile nature of refining margins, or crack spreads. A refiner does not care about oil prices, but a pure oil producer does. A refiner cares about the difference in the price of refined product and crude oil; the bigger the difference the more money they make…or lose.
Crack spreads are not only highly seasonal but they are also highly economically cyclical. Because it spun off its refining business and dramatically reshuffled its whole asset portfolio, Conoco is probably my favorite US oil company. It has undergone the most dramatic transformation of all the majors in order to increase the profitability of its overall business, with shareholder interests as the leading factor.