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ConocoPhillips Wins Dividend Battle Vs. Chevron, Exxon

Dividend growth has more than tripled in the past 10 years


For years, ConocoPhillips (NYSE:COP) has tended to trade at cheaper valuation multiples than either Chevron* (NYSE:CVX) or ExxonMobil* (NYSE:XOM) due to its large exposure to refining and natural gas. Conoco carries lower operating margins (9.84%) and lower gross margins (22.8%) than either of those two competitors, which is why in July it decided to do exactly what Marathon Oil* (NYSE:MRO) did earlier this year: split into two separate companies.

Spinning off the refining operations will raise the margins of the parent company and unlock shareholder value. Pure exploration and production companies tend to trade at higher valuations in the stock market than oil refiners. Conoco has already done a lot of restructuring to increase shareholder value by instituting stock buybacks, raising the dividend payout, and selling its entire 20% stake in Russia-based Lukoil (PINK:LUKOY).

The current dividend yield is 3.8% with only a 32% payout ratio. That means that the dividend can grow much higher from here as management works on increasing profitability. In the past year, Conoco produced more than $20 billion in operating cash flow, of which over $10 billion is levered free cash flow. There is over $27 billion of debt on the balance sheet, but management is committed to lowering the leverage through asset sales and further restructuring.

Dividend growth has been quite substantial in the past 10 years. Since 2003, Conoco’s quarterly dividends have more than tripled from 20 cents per share to the current rate of 66 cents, while the company has grown both organically and through acquisitions. The ability to grow and maintain the dividend payout is key to long-term shareholders in the stock. This happens through a healthy rate of reserve replacement that amounted to 138% of 2010 production (a better than 100% reserve replacement ratio shows growing reserves and likely higher revenues in the future as production grows).

Conoco offers a higher dividend yield than either Chevron (3.1%) or ExxonMobil (2.4%). With the current restructuring, the stock could get a boost judging by the way Marathon Oil and its spinoff Marathon Petroleum (NYSE:MPC) have performed so far in 2011. With faster economic growth in emerging markets, oil prices are likely to remain elevated over time. Developing nations tend to consume more oil per dollar of GDP than developed markets due to the less important role in their economies that comes from service industries. This is great for ConocoPhillips and could support a further rise in the dividend in the future.

*Navellier may hold this security in one or more investment strategies offered to its clients.

Article printed from InvestorPlace Media,

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