Woe to the oil sector…
Crude oil prices have dipped below $50 per barrel for West Texas crude prices, with any number of analysts predicting a $20 per barrel floor.
The sector is seeing layoffs across the spectrum of suppliers, producers and middle-men.
Marathon Oil (MRO) “adjusted” its dividend in the face of its struggles to maintain a strong cash flow position.
Yessir, all is going to heck in a hand basket for the industry and the underlying stocks of its players.
Unless, of course you want to look at things a bit differently…
That’s where the dividends part comes in.
Riding out the storm while collecting steady paychecks keeps a floor under the price of those who are firm in paying consistent and rising dividends to investors.
Keep your eyes fixed on the dividends from the biggest players still in the game.
Those who can do it are able to for the simplest of reasons: cash. They’ve got lots of it, continue to generate it in the form of free cash flow, and have payout ratios that will allow for future headroom.
Remember, it’s a long-term investment, and you can safely navigate this.
Here are those three names to know…
Phillips 66 (PSX)
We can start by picking up a company that’s deeply involved in the oil and gas business, just not in its exploration or production side.
Phillips 66 (PSX) is instead deep in the logistics side with specialties in the chemicals, refining, marketing and specialties sides of the business.
Phillips also gathers, processes, transports and markets natural gas and natural gas liquids, and manufactures and markets petrochemicals.
What it all means is that PSX isn’t tied down solely by the oil business.
Of course that doesn’t mean it’s immune to the sector pain. Revenues fell from $195 million at FY (December 31) 2011 to $161 million at the end of FY 2014.
The good news is the picture is improving based on PSX’s just-released 3Q (September 3) which suggest a nice recovery ahead for PSX:
What we’re looking for here is a solid dividend player, too, and on that score PSX looks strong.
PSX’s quarterly payout of 56 cents per share is a very nice jump from the 21 cents per share in 2011, and the 2.60% dividend yield is a bonus.
With free cash flows (after capital expenditures) running at around $2 billion annually and over $5 billion in cash on the balance sheet, PSX has the juice to continue those dividend increases.
With a dividend payout ratio barely scraping 25%, it also has the room to grow.
Those cash flows and balances have not gone unnoticed out in investor-land…
Motley Fool’s Adam Galas is a big long-term fan, as is InvestorPlace’s Aaron Levitt, who noted that Warren Buffett’s Berkshire Hathaway (BRK.A,BRK.B) plowed around $4 billion into PSX stock in September, lifting his stake to over 11% of PSX.
It’s time for wise energy investors to get on board with PSX and start waiting for those dividend checks…
Valero Energy (VLO)
Again, staying away from direct oil price exposure is always a strong play, and Valero Energy (VLO) hits the mark.
Valero both manufactures and markets transportation fuels in addition to other petrochemical products. It owns refineries producing conventional and premium gasoline grades, diesel fuels, jet fuel, petrochemicals and lubricants for a variety of manufacturing uses.
In other words, Valero is diversified. And it’s profitable, too.
Despite a slump in annual revenues from FY (December 31) 2012’s $138.4 billion to 2014’s $130.8 billion, Valero’s managed to increase net income to $3.7 billion in 2014, up from $3.1 billion in 2012.
On October 28 Valero reported better-than-expected earnings for its third quarter ended September 30, with a $2.79 per share performance over $22.6 billion in revenues (also a beat).
Even sweeter, S&P Capital IQ Equity Research raised its 2015 EPS estimates by 41 cents per share for 2015, and 34 cents for 2016.
Wait! It gets better. VLO raised its dividend 25% to 50 cents per share per quarter, up from 40 cents per share, today yielding 2.81%.
With a nearly $2 billion annual free cash flow, $3.7 billion on the balance sheet, and a payout ratio of an astoundingly low 15% according to Yahoo! Finance, VLO should continue to reward oil patch investors concerned over dwindling dividend paying options.
Energy SPDR (XLE)
Hang with this one for a minute….
Yes, the Energy SPDR (XLE) represents all that is oil and gas, with all its forward concerns over global prices, slumps, and geopolitical implications.
But here’s the good news: XLE has actually appreciated over the past 5-year period (despite getting crushed both year-to-date and last year), and its dividend has increased along with the price.
Take a look into the portfolio and you can see that, at least for the dividend, and that’s where we want to play since increases are almost virtually assured for a huge reason: Exxon Mobil (XOM) and Chevron (CVX), the King and Queen of the Energy Ball, make up 30% of the portfolio.
And as we’ve said many times, including here and here, neither of those two behemoths is 1) going away anytime soon, and 2) going to put themselves in a position to cut their dividends.
Period.
Which is a very good start for a stock whose dividend is the most important aspect today for long-term investors.
Here’s one more piece to add: according to Todd Shriber at Benzinga, historical data indicates that XLE was the best of the “Nine SPDRS” during the Fed’s 2004-2006 interest rate tightening cycle. Should the Fed start to raise rates in the near term, that bodes well for the sector, and XLE dividends.
The bottom line of XLE is that, at a minimum, its dividend payouts are not going down with the proverbial Exxon/Chevron ships, and it should be a very nice quarterly payout for patient dividend investors looking for income.
As of this publication, Marc Bastow is long XOM.
This post originally appeared in mainstreetinvestor.com.
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