3 Oil Stocks Gushing Dividend Income

by Marc Bastow | September 21, 2012 10:00 am

The recent downdraft in the price of oil[1] is nice for everyone who buys oil. But deep in your heart you just know it can’t — and won’t — last.

It’s just the nature of the supply-and-demand beast, as eloquently explained by Money Morning Global Energy Strategist Dr. Kent Moors, who lays out his reasons[2] why oil prices will rise, based on data supplied through Bernstein Research.

But after cursing at the gas pump, investors can use the few minutes it takes to fill up the tank to think about long-term dividend plays in big oil companies with pockets deeper than the wells they drill.

I’m primarily talking about Exxon Mobil (NYSE:XOM[3]), Chevron (NYSE:CVX[4]) and Royal Dutch Shell (NYSE:RDS.A[5]). And I can succinctly explain why these three represent the cream of the oil-stock dividend crop: cash, low risk, high yield and room to run. Let’s take a look at the numbers:

Name Div/Year Div Yield P/E Cash Div Payout
Chevron $3.60 3.09% 8 $21B 25%
Exxon $2.28 2.52% 9.5 $17B 21%
Shell $3.44 4.62% 8 $17B 34%

What makes these three such attractive dividend investment options isn’t just the nominal value of the payouts, but the impressive yields and potential for continued dividend increases for the very long term. Combine all that potential with an industry that even in the most dire years of low oil and gas prices can still turn a buck, and you have a winning combination.

Take Chevron: Dividend growth has increased 150% over the last 10 years, while CVX’s cash balance has exploded up over 685%. Given Chevron’s loads of cash and a small payout ratio, investors should be able to enjoy increased dividends even at times, like now, when revenues are bouncing around a bit as oil and gas prices dance, too.

Exxon is a bit of a poster-child dilemma for dividend investors because it’s historically paid out a small percentage[6] in dividends, instead hoarding cash for stock repurchase plans that have taken millions of shares off the market.

Indeed, in the second quarter of 2012 Exxon used $5 billion to purchase shares, and total shares outstanding have decreased from 6.954 billion in 1999 to 4.716 billion in 2012. The good news is that the buybacks help Exxon’s EPS, but I prefer to keep looking to the dividend increases, slow as they might be over time.

Shell is headquartered in The Hague, Netherlands, with its registered office in London. And in case you didn’t know, it’s the fifth-largest company in the world, according to a composite measure by Forbes.

The company has kept a pretty steady cash and equivalents position of around $15 billion to $17 billion on hand over the last five years, and free cash flow in the last two quarters of 2012 has added nearly $7 billion to that number. Even with the largest payout ratio of our three giants, RDS.A has plenty of room to run considering its dividend has increased only 55% over the last 10 years.

Of course, there are alternatives to consider as part of an oil income portfolio, but for the most part those companies leave me a little cold due strictly to their cash — or lack of it:

Conoco (NYSE:COP[7]) has a wonderful 4.59% dividend yield, but with just a tad over $1 billion in cash, the long term doesn’t get me as worked up. Marathon Oil (NYSE:MRO[8]) sports an acceptable 2.23% dividend yield, but with just a 17 cent quarterly payout and under $500 million in the bank, it’s not enough bang for the buck for me.

As for global giant BP (NYSE:BP[9]), well, that one’s a tough call. With a dividend yield over 4%, it appears attractive, but all signs seem to point downward: Payouts from the Deepwater Horizon disaster continue, margins are eroding[10], divestitures are ongoing[11] and it feels like a bit of a trap to invest in.

While prices for my three oil gushers are fairly steep right now (indeed, an overbought case can be made), waiting it out for a lower price and buying into these income stars is a great way to play the pain at the pump against the gain in the wallet.

Marc Bastow is an Assistant Editor at InvestorPlace.com. As of this writing he is long XOM.

  1. downdraft in the price of oil: https://investorplace.com/2012/09/sell-off-the-slippery-slide-in-crude-uso/
  2. lays out his reasons: https://moneymorning.com/2012/09/20/you-can-drill-all-you-want-oil-prices-are-still-headed-higher/
  3. XOM: http://studio-5.financialcontent.com/investplace/quote?Symbol=XOM
  4. CVX: http://studio-5.financialcontent.com/investplace/quote?Symbol=CVX
  5. RDS.A: http://studio-5.financialcontent.com/investplace/quote?Symbol=RDS.A
  6. historically paid out a small percentage: https://investorplace.com/2012/08/i-want-my-dividends-increased-aapl-msft-orcl-jnj-xom-wmt/
  7. COP: http://studio-5.financialcontent.com/investplace/quote?Symbol=COP
  8. MRO: http://studio-5.financialcontent.com/investplace/quote?Symbol=MRO
  9. BP: http://studio-5.financialcontent.com/investplace/quote?Symbol=BP
  10. margins are eroding: https://investorplace.com/2012/09/14-oil-and-gas-stocks-to-sell-now-lgcy-eqt-bp/
  11. divestitures are ongoing: https://investorplace.com/2012/08/bp-an-energy-giant-thats-shriveling-fast/

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